Mirion, Inc., has a debt-equity ratio of 50 percent, with no preferred stock. However, Mirion now plans to raise enough preferred stock to retire half of its outstanding common stock. Its common equity is currently valued at $7 million. Which of the following choices displays Mirion's market value capital structure, in market values (i.e., V = D + P +E), after the preferred stock issue?

Question

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Mirion's current common equity is $7 million, and it plans to retire half of its common stock with preferred stock. This means the new equity value will be $3.5 million. Since the debt-equity ratio is 50 percent, the debt is also $3.5 million. The preferred stock issued to replace half of the common stock will also be $3.5 million. Therefore, the new capital structure will be $3.5 million each in equity, preferred stock, and debt, totaling $10.5 million in market value.