Calculate total value of each firm and break-down of value

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Question 1: There are two firms in the same business: Air Wolf and Red Wolf. Both are in the same risk class and each has an EBIT (Earnings Before Interest & Taxes) of $10 million. Air Wolf has no debt and Red Wolf has $4 million of debt. The cost of equity is 8% and the cost of debt is 10%. Assume a tax rate of 30%. Use the Modigliani & Miller (M&M) model to calculate the: (a) total value of each firm and (b) the break-down of value or capital structure in terms of its components (debt & equity).

Reference no: EM132543334

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