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Consider two firms that are identical except the method of

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Consider two firms that are identical except the method of financing. Firm U has no debt, and firm L has $20 million of debt outstanding at 10%. The corporate tax rate is 40%. The cost of equity is 15%. The EBIT is equal to $4 million per year.

  1. What is the value of U ?
  2. What is the value of firm L according to MM?
  3. What is the gain from leverage?
  4. What is the cost of equity of the leverage firm?
  5. What is the value of equity in the leveraged firm?

 

Reference no: EM13571339

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