Companies u and l are identical in every respect except, Ask an Expert

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Companies U and L are identical in every respect except that U is unlevered while L has: $10 million of 5% bonds outstanding.

Assume that:

(1) All of the MM assumptions are met.

(2) Both firms are subject to a 40% federal-plus-state corporate tax rate.

(3) EBIT is $2 million.

(4) The unlevered cost of equity is 10%.

Questions:

a. What value would MM now estimate for each firm? (Hint: Use Proposition 1.)

b. What is rs for Firm U? For Firm L?

c. Find SL, and then show that SL D VL results in the same value as obtained in Part a.

d. What is the WACC for Firm U? For Firm L Please how Excel syntax/formula for answer

Please show Excel syntax/formulas

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M92772486

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