Assume that Firms U and L are in the same risk class and that both have EBIT = $500000. Firm U uses no debt financing and its cost of equity
is rsu = 14%. Firm L has $1 million of debt outstanding at a cost rd =8%. There are no taxes. Assume that the MM (Modigliani and Miller)
1.Find V S rs and WACC for Firms U and L.
2.Graph (a) the relationships between capital costs and leverage as measured by D/V and (b) the relationship between V
Now assume that Firms L and U are both subject to a 40% corporate tax rate. Using the data given repeat the analysis called for in (1) and (2)
under the MM model with taxes.