Question: MM without Taxes
Companies U and L are identical in every respect except that U is unlevered while L has $7 million of 8% 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 10%.
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 $ million
Company L $ million
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. %
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. $ million
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. %
Suppose VU = $20 million and VL = $22 million. According to MM, are these values consistent with equilibrium?