Company U and company L are identical in every respect except company U is unlevered...
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Company U and company L are identical in every respect except company U is unlevered and company L has $8,000,000 perpetual debt with an interest rate of 4%. Both companies are expecting to have an EBIT of $1,200,000 in perpetuity and all earnings will be immediately distributed to common shareholders. Company U has a cost of equity of 6%. Assume that all Modigliani and Miller assumptions are satisfied. Calculate the cost of equity for the levered firm according to MM proposition II without taxes.
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