Assume you have a project that has a life of 10 years. The amount of debt you choose to finance the project is equal to D and is kept constant for the life of the project. The unlevered return on equity is rU and the debt’s expected return is rD.. The company’s profits are taxed at a rate τ, and the levered value of equity is E, such that, E+D=VL where VL is the levered value of the assets and D is the value of debt. Derive, similarly to what we did in class, the Modigliani Miller proposition II at t=0 - that is derive the value of the expected return on levered equity rE - in this case. Assume interests are tax-deductible.

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