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The U Co. and the L Co. are identical in all aspects except that U Co. is all-equity financed while L Co. has $1,000 debt in 6% perpetual bonds outstanding (on which $60 of interest is paid each year). Both firms have expected net operating income of $300 (forever). Both firm distribute as dividends all income available to shareholders. There are no taxes. Assume no agency costs or bankruptcy costs. The cost of equity is 10% for the U Co. and 12% for the L co.
38. What is the market value of the L Co.?A) $2,000B) $1,000C) $3,000D) $6,000
39. What is the cost of capital for the L Co.?A) 9%B) 8%C) 10%D) 12%
40. What is the total income available annually to the U Co.'s security holders?A) $300B) $155C) $65D) $240
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