Federal-plus-state corporate tax rate

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Reference no: EM131969673

MM with Corporate Taxes

Companies U and L are identical in every respect except that U is unlevered while L has $16 million of 6% bonds outstanding. Assume that: (1) All of the MM assumptions are met. (2) Both firms are subject to a 35% federal-plus-state corporate tax rate. (3) EBIT is $4 million. (4) The unlevered cost of equity is 13%.

What value would MM now estimate for each firm? (Hint: Use Proposition I.) Enter your answers in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answers to two decimal places.

Company U $ million

Company L $ million

What is rs for Firm U? Round your answer to one decimal place.

What is rs for Firm L? Do not round intermediate calculations. Round your answer to one decimal place.

Find SL, and then show that SL + D = VL results in the same value as obtained in Part a. Enter your answers in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Do not round intermediate calculations. Round your answers to two decimal places.

SL = $ million

SL + D = $ million

What is the WACC for Firm U? Do not round intermediate calculations. Round your answer to two decimal places.

What is the WACC for Firm L? Do not round intermediate calculations. Round your answer to two decimal places.

Reference no: EM131969673

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