Question

Companies U and L are identical in every respect except that U is unlevered while L has $8 million of 5% bonds outstanding. Both firms have an EBIT of $2 million. Assume that all of the MM assumptions are met.

1. Suppose that both firms are subject to a 35% federal-plus-state corporate tax rate, investors in both firms face a tax rate of T_d = 28% on debt income and T_s = 20% (on average) on stock income, and the appropriate required pre-personal-tax rate r_sU is 10%.What is the value of the unlevered firm, V_U? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to two decimal places.
$ million

2. What is the value of the levered firm, V_L? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to two decimal places.
$ million

3. What is the gain from leverage? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to two decimal places.
$ million

4. Now keep the other assumptions (D = $8 million, r_d = 5%, EBIT = $2 million, and r_sU = 10%) but set T_c = T_s = T_d = 0. What is the value of the unlevered firm, V_U? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to two decimal places.
$ million

5. What is the value of the levered firm, V_L? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to two decimal places.
$ million
6. What is the gain from leverage? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to two decimal places.
$ million

7. Keep the other assumptions (D = $8 million, r_d = 5%, EBIT = $2 million, and r_sU = 10%) but now suppose T_d = T_s = 0 and T_c = 40%. What is the value of the unlevered firm, V_U? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to two decimal places.
$ million

8. What is the value of the levered firm, V_L? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to two decimal places.
$ million

9. What is the gain from leverage? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to two decimal places.
$ million

10. Keep the other assumptions (D = $8 million, r_d = 5%, EBIT = $2 million, and r_sU = 10%) but now suppose that T_d = 28%, T_s = 28%, and T_c = 40%. Now what is the value of the levered firm? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to two decimal places.
$ million

11. What is the gain from leverage? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to two decimal places.
$ million