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What value would mm estimate for each firm

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Question: MM without Taxes

Companies U and L are identical in every respect except that U is unlevered while L has $7 million of 8% bonds outstanding. Assume that (1) there are no corporate or personal taxes, (2) all of the other MM assumptions are met, (3) EBIT is $3 million, and (4) the cost of equity to Company U is 10%.

What value would MM estimate for each firm? 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 two decimal places. %

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

Find SL. Round your answer to two decimal places. Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. $ million

What is the WACC for Firm U? Round your answer to one decimal place. %

What the WACC for Firm L? Round your answer to one decimal place. %

Suppose VU = $20 million and VL = $22 million. According to MM, are these values consistent with equilibrium?

Reference no: EM132001567

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