Company J is debt-free and has a weighted average cost of capital of 12

Finance Jan 21, 2021

Company J is debt-free and has a weighted average cost of capital of 12.7%. The current market value of the equity is $2.8 million and there are no taxes. According to MM proposition I, what will be the value of the company if it changes to a debt-equity ratio of 5?

A.2,100,000

B. 5,600,000

C. 1,400,000

D. None

E. 2,800,000

Expert Solution

The correct option is E "$2,800,000".

In M&M proposition 1 with no taxes, the value of the levered and unlevered firm is the same.

Value of Levered Firm = Value of Unlevered Firm

So, the value of company will be $2,800,000.

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