Use the information for the question(s) below.
Consider two firms, Firm X and Firm Y, that have identical assets that generate identical cash flows. Firm Y is an all-equity firm, with 1 million shares outstanding that trade for a price of $24 per share. Firm X has 2 million shares outstanding and $12 million in debt at an interest rate of 5%.
-According to MM Proposition I, the stock price for Firm X is closest to ________.
A) $8.00
B) $24.00
C) $6.00
D) $12.00

Question

Quizplus · Accepted Answer

C) Under MM I, the total value of Firm X and Firm Y must be the same.
Value(Firm Y) = 1,000,000 × $24 = $24 million = Value(Firm X)
Value(levered equity) = value(Firm X) - debt = $24 million - $12 million = $12 million
Price per share = 11ea84dc_f509_c102_9a63_590e573d5d96_TB1316_11_TB1316_11 = $6.00

Use the Information for the Question(s) Below