Firms U and L are identical except that Firm U is financed with 100% equity...
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Accounting
Firms U and L are identical except that Firm U is financed with 100% equity while Firm L has $10 million of 5% bonds. Assume that all of the MM assumptions are met, EBIT is $2 million and the cost of equity to Firm U is 10%.
a. Assume that there are no corporate or personal taxes, 1. What would be the value of Firm U and Firm L according to MM? 2. What is rs for Firm U and rs for Firm L?
b. Assume that both firms are subject to a 40% corporate tax rate 1. What would be the value of Firm U and Firm L according to MM? 2. What is rs for Firm U and rs for Firm L?
c. Assume that both firms are subject to a 40% corporate tax rate and the personal tax rate is 28% on debt income and 20% on stock income. 1. What would be the value of Firm U and Firm L according to Miller?
NOTE- THIS IS A SINGLE QUESTION HAVING SUBPARTS. PLEASE ANSWER ALL THE QUESTIONS FOR POSITIVE FEEDBACK. THANKS
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