Question

Lamont Corp. is debt-free and has a weighted average cost of capital of 12.7 percent. The current market value of the equity is $2.3 million and there are no taxes. According to M&M Proposition I, what will be the value of the company if it changes to a debt-equity ratio of .85? Multiple Choice $2,300,000 $2,705,882 $15,393,701 $18,110,236 $1,955,000

Answer 1

Answer:

Option A. $2,300,000

Explanation:

The first proposition of M & M model says that the debt to equity does not have any impact on the share value of the company because the value of the company shares are calculated on the basis of the discounted future cash flows generated by the company. So according to M&M Proposition I, the value of company shares calculated here is $2.3 million for 100% equity financed company which will remain same for all debt to equity structure.