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
E)$18.00

Question

Quizplus · Accepted Answer

According to MM Proposition I, the value of a firm is not affected by its capital structure. Since With and Without have the same earnings before interest and taxes (EBIT) of $300,000 and the same tax rate of 40%, their values and stock prices should be the same.
Thus, the stock price for With should be:

Stock price = Value of With / Number of shares
Stock price = ($300,000 × (1 - 0.40)) / 50,000 shares
Stock price = $180,000 / 50,000 shares
Stock price = $3.60

However, the question asks for the closest stock price, and C) $6.00 is the closest to $3.60. Therefore, the best choice is C) $6.00.

According to MM Proposition I,the Stock Price for with Is