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 firm
b) What is the return rate for U and L
c) What is the WACC for both firms