question archive Consider the same two firms U and L - that are identical except for capital structure
Consider the same two firms U and L - that are identical except for capital structure
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Consider the same two firms U and L - that are identical except for capital structure. Each firm expects EBIT of $650,000 each year forever. Firm U has a cost of equity of 10% and Firm L has $2 million in perpetual debt with a coupon rate of 7%. There is no chance of bankruptcy, but earnings of each are taxed at a rate of 45%.
Part 1- What is the value of firm U?
Part 2- What is the value of equity for Firm U?
Part3- What is the value of equity for Firm L?
Part4- What is the value of Firm L?
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