Company U and company L are identical in every respect except company U is unlevered and company L has $8,000,000 perpetual debt with an interest rate of 4%. Both companies are expecting to have an EBIT of $1,200,000 in perpetuity and all earnings will be immediately distributed to common shareholders. Company U has a cost of equity of 6%. Assume that all Modigliani and Miller assumptions are satisfied. Calculate the cost of equity for the levered firm according to MM proposition Il without taxes.(Do not round intermediate calculations. Round the final answer to 2 decimal places. Omit the % sign in your response. For example, an answer of 15.39% should be entered as 15.39.)
Company U and company L are identical in every respect except company U is unlevered and company L has $8,000,000 perpetual debt with an interest rate of 4%. Both companies are expecting to have an EBIT of $1,200,000 in perpetuity and all earnings will be immediately distributed to common shareholders. Company U has a cost of equity of 6%. Assume that all Modigliani and Miller assumptions are satisfied. Calculate the cost of equity for the levered firm according to MM proposition Il without taxes.(Do not round intermediate calculations. Round the final answer to 2 decimal places. Omit the % sign in your response. For example, an answer of 15.39% should be entered as 15.39.)
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Company U and company L are identical in every respect except company U is unlevered and company L has
$8,000,000 perpetual debt with an interest rate of 4%. Both companies are expecting to have an EBIT of $1,200,000 in
perpetuity and all earnings will be immediately distributed to common shareholders. Company U has a cost of equity of
6%. Assume that all Modigliani and Miller assumptions are satisfied. Calculate the cost of equity for the levered firm
according to MM proposition Il without taxes.(Do not round intermediate calculations. Round the final answer to 2
decimal places. Omit the % sign in your response. For example, an answer of 15.39% should be entered as 15.39.)
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