Consider the following information for an unlevered firm U:
EBIT = $1,600 annually
Unlevered value VU = $4,000
Tax rate = 34%
Cost of debt = 10%
A levered firm L in the same business risk class has a debt/equity ratio of 1.
Use the M&M Propositions to determine the
a. after-tax cost of equity for firms U and L
b. after-tax WACC for both firms.