How does the use of debt affect stock value

How does the use of debt affect stock value

Assume that Firms U and L are in the same risk class and that both have EBIT = $500,000. Firm U uses no debt financing, and its cost of equity
is r_su = 14%. Firm L has $1 million of debt outstanding at a cost r_d =8%. There are no taxes. Assume that the MM (Modigliani and Miller)
assumptions hold.

1.Find V, S, r_s, and WACC for Firms U and L.

2.Graph (a) the relationships between capital costs and leverage as measured by D/V and (b) the relationship between V
and D.

Now assume that Firms L and U are both subject to a 40% corporate tax rate. Using the data given repeat the analysis called for in (1) and (2)
under the MM model with taxes.

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