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Companies U and L are identical in every respect except that U is unlevered while L has $11 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 $2 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.

Company U $ _____ million
Company L $ _____ million

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.
_____ %

Suppose VU = $20 million and VL = $22 million. According to MM, are these values consistent with equilibrium?
-Select- Yes or No

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Nestor Rutherford
Nestor RutherfordLv2
29 Sep 2019

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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.

Company U $ ________ million
Company L $ ________ million

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?
_________________

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 Td = 28% on debt income and Ts = 20% (on average) on stock income, and the appropriate required pre-personal-tax rate rsU is 10%.What is the value of the unlevered firm, VU? 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, VL? 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, rd = 5%, EBIT = $2 million, and rsU = 10%) but set Tc = Ts = Td = 0. What is the value of the unlevered firm, VU? 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, VL? 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, rd = 5%, EBIT = $2 million, and rsU = 10%) but now suppose Td = Ts = 0 and Tc = 40%. What is the value of the unlevered firm, VU? 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, VL? 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, rd = 5%, EBIT = $2 million, and rsU = 10%) but now suppose that Td = 28%, Ts = 28%, and Tc = 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

Bayani Bakery's most recent FCF was $49 million; the FCF is expected to grow at a constant rate of 6%. The firm's WACC is 13% and it has 15 million shares of common stock outstanding. The firm has $30 million in short-term investments, which it plans to liquidate and distribute to common shareholders via a stock repurchase; the firm has no other nonoperating assets. It has $367 million in debt and $59 million in preferred stock. What is the value of operations? 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 Immediately prior to the repurchase, what is the intrinsic value of equity? 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 Immediately prior to the repurchase, what is the intrinsic stock price? Round your answer to the nearest cent. $ per share How many shares will be repurchased? 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 shares How many shares will remain after the repurchase? 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 shares Immediately after the repurchase, what is the intrinsic value of equity? 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 The intrinsic stock price? Round your answer to two decimal places. $ per share

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