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  3. you consider two companies, one ungeared, co u, an

You consider two companies, one ungeared, Co U, and one geared, Co G, both of...

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You consider two companies, one ungeared, Co U, and one geared, Co G, both of the same size and level of business risk. Co U Co G $m $m EBIT 100 100 interest . 20 PBT 100 80 Tax@35% 35 28 Dividends 65 52 Returns to investors: Equity 65 52 Debt - 20 65 72 Suppose that the business risk for the two companies requires a return of 10% and the return required by the debt holders in Co G is 5% Required: a) Calculate the market value of Co U and Co G. b) Calculate the Weighted Average Cost of Capital (WACC) according to the MM's theory. c) Draw a conclusion

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