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What would be the cost of capital of yellow plc and of green

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

-According to MM Proposition 1, what should be the stock price for Yellow plc? Fully explain your answer

-If the annual earnings before interest and taxes for each firm are $5 million, what would be the cost of capital of Yellow plc and of Green plc? Fully explain your answer.

Reference no: EM132515817

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