What is firm weighted average cost of capital

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Reference no: EM131177435

Unlevered Corporation (Firm U) has a total market value of $5,000,000, a tax rate of 40 percent, and earnings before interest and taxes (EBIT) of $1,000,000. Levered Corporation (Firm L) is identical in all respects to Firm U, but Firm L has $3,000,000 market (and book) value of debt outstanding. Firm L pays total annual interest of $270,000 on this debt. Both firms satisfy the MM assumptions.

a. What is the value of Firm L according to MM’s Proposition I with corporate taxes?

b. What is Firm U’s cost of equity?

c. What is Firm L’s cost of equity?

d. What is Firm L’s weighted average cost of capital?

Reference no: EM131177435

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