Question

Companies U and L are identical in every respect except that U is unlevered while L has $12 million of 7% bonds outstanding. Assume that all of the original M&M assumptions are met, that EBIT is $3 million for both companies and that the cost of equity to company U is 9%. Assuming that there are both corporate and personal taxes for both firms as follows, compute the value of firm L. Corporate marginal tax rate = 34%, Personal tax rate on debt = 28%, Personal tax rate on equity = 20%

A)$20.80 million

B)$25.2 million

C)$22 million

D)$17.6 million

Answer 1