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An unlevered firm has a weighted average cost of capital of 14 percent. The current market...

An unlevered firm has a weighted average cost of capital of 14 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?

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 value of the unlevered company will be equal to value of the levered company when there is no taxes without regard to change in capital structure

So option D is correct

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