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Companies U and L are identical is every respect except that U is unlevered while L has $10 million of 5% bonds outstanding. Assume that (1) all of the MM assumptions are met, (2) both firms are subject to a 40% federal-plus-state corporate tax rate, (3) EBIT is $2 million and (4) the unlevered cost of equity is 10%
a) What value would MM now estimate for each firmb) What is the return rate for U and Lc) What is the WACC for both firms
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Sutton Corporation, which has a zero tax rate due to tax loss carry-forwards, is considering a 5-year, $6,000,000 bank loan to finance service equipment.
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Discuss how interest based bargaining is different from other techniques.
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