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Consider two firms, Firm X and Firm Y, that have identical assets that generate identical cash flows. Firm Y is an all-equity firm, with 1 million shares outstanding that trade for a price of $24 per share. Firm X has 2 million shares outstanding and $12 million in debt at an interest rate of 5%. What is the stock price for Firm X

Respuesta :

Answer: $6

Explanation:

To solve this question, we can use the Modigliani-Miller theorem. Since Firm Y is an all-equity firm, and has 1 million shares outstanding that trade for a price of $24 per share.

On the other hand, Firm X has 2 million shares outstanding and $12 million in debt at an interest rate of 5%. Therefore, the stock price for Firm X will be:

= ($24 - $12) / 2

= $12/2

= $6

Therefore, the stock price for Firm X is $6.

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