M without Taxes
Companies U and L are identical in every respect except that U is unlevered while L has $9 million of 7% 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 12%.
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
Company L
B. 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.
C. 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.
D. 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.
E. Suppose VU = $20 million and VL = $22 million. According to MM, are these values consistent with equilibrium?