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An unlevered firm has a weighted average cost of capital of (10+x) percent. The current market...

An unlevered firm has a weighted average cost of capital of (10+x) percent. The current market value of the unlevered firm $250 million. Assuming a perfect capital market and according to M&M Proposition I, what will be the value of the levered company if it changes to a debt-equity ratio of 1? let x=1

A) $125

B) $168.75

C) $206.25

D) $250

E) $293.75

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Answer #1

Correct answer is option D

According to mm proportion 1 when there is no taxes value of levered firm will be equal to Value of unlevered firm for any capital structure

Value of unlevered firm = 250

So offer debt issue also value of levered firm will be 250 as there is no taxes

So D is correct

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