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Consider two firms,With and Without,that have identical assets that generate identical cash flows.Without is an all-equity firm,with 1 million shares outstanding that trade for a price of $24 per share.With 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 With is closest to:
A)$8.00
B)$24.00
C)$6.00
D)$12.00

Question

Quizplus · Accepted Answer

According to MM Proposition I, the value of a firm is determined solely by its cash flows and the risk of its underlying assets, and not affected by its capital structure. Therefore, both With and Without should have the same total value, and since Without has 1 million shares outstanding that trade for a price of $24 per share, the value of With's 2 million shares should be the same, resulting in a stock price of $24.00.

Use the Information for the Question(s)below