CT Stores has debt with a book value of $325,000 and a market value of $319,000.The firm's equity has a book value of $526,000 and a market value of $684,000.The tax rate is 21 percent and the cost of capital is 11.2 percent.What is the market value of this firm based on MM Proposition I without taxes?
A)$923,250
B)$1,003,000
C)$984,300
D)$851,000
E)$769,750

Question

Quizplus · Accepted Answer

MM Proposition I without taxes states that the value of a leveraged firm is equal to the value of an unleveraged firm, meaning the capital structure does not affect the firm's value. Therefore, the market value of the firm is simply the sum of the market value of debt and equity. Market value of debt = $319,000 and market value of equity = $684,000. Thus, the total market value = $319,000 + $684,000 = $1,003,000.

CT Stores Has Debt with a Book Value of $325,000