Determine v-s-rs and wacc for firms u and l

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Reference no: EM13334725

Assume that Firms U and L are in the same risk class and that both have EBIT = $500,000. Firm U uses no debt financing, and its cost of equity is rsu = 14%. Firm L has $1 million of debt outstanding at a cost rd =8%. There are no taxes. Assume that the MM (Modigliani and Miller) assumptions hold.

1. Find V, S, rs, and WACC for Firms U and L.

2. Graph (a) the relationships between capital costs and leverage as measured by D/V and (b) the relationship between V and D.

Now assume that Firms L and U are both subject to a 40% corporate tax rate. Using the data given repeat the analysis called for in (1) and (2) under the MM model with taxes.

Reference no: EM13334725

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