Explain the market value of the firm

Reference no: EM1317087

Firm U is an unlevered firm with $2.5 million of EBIT, tax rate 34%, and a 10% required return on equity.

a. Suppose firm U is levered with $12 million of 7% bonds. What is the market value of the resulting levered firm L?

b. Suppose there are two firms, A and B, that are identical in all respects to the unlevered firm U and the levered firm L. The market value of A is $12,000,000 and the market value of B is $22,000,000. What is likely to happen as a consequence of these prices?

Reference no: EM1317087

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