MM without Taxes (PLEASE NOTE THAT NUMBERS ARE DIFFERENT THATN IN TEXTBOOK) Comp
ID: 2760440 • Letter: M
Question
MM without Taxes (PLEASE NOTE THAT NUMBERS ARE DIFFERENT THATN IN TEXTBOOK)
Companies U and L are identical in every respect except that U is unlevered while L has $8 million of 7% bonds outstanding. Assume that (1) there are no corporate or personal taxes, (2) all of the other MM assumptions are met, (3) EBIT is $1 million, and (4) the cost of equity to Company U is 10%.
a. 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.
b. 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.
________ %
c. 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
d. 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.
________ %
e. Suppose VU = $20 million and VL = $22 million. According to MM, are these values consistent with equilibrium?
_________________
Explanation / Answer
a)Note: There is no information provided regarding the cost of equity for Company L, neither the total capital. One of these are required to calculate the value of the firm. So, I assume that the cost of equity for Company C also is 10% only.
Company U
Company L
EBIT
$1,000,000.00
$1,000,000.00
Less: Interest
$0.00
$560,000.00
Earnings Available to Equity Holders
$1,000,000.00
$440,000.00
Equity Capitalization Rate
10%
10%
Total Market Value of Equity
$10,000,000.00
$4,400,000.00
Total Market Value of Debt
$0.00
$8,000,000.00
Total Market Value of Firm
$10,000,000.00
$12,400,000.00
Please provide the below required information to answer this question fully:
Full for of rs & SL.
Total Capital Structure.
Company U
Company L
EBIT
$1,000,000.00
$1,000,000.00
Less: Interest
$0.00
$560,000.00
Earnings Available to Equity Holders
$1,000,000.00
$440,000.00
Equity Capitalization Rate
10%
10%
Total Market Value of Equity
$10,000,000.00
$4,400,000.00
Total Market Value of Debt
$0.00
$8,000,000.00
Total Market Value of Firm
$10,000,000.00
$12,400,000.00
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