Answer: Unlevered firm Equity is worth $357,700,000.
Levered firm Equity is worth $283,700,000 going by the Modigliani-Miller Proposition I.
Explanation:
The Unlevered firm has no debt and so the value of it's equity can be calculated by simply multiplying shares outstanding by the market price.
= 4.9 million * 73
= $357,700,000
Unlevered firm Equity is worth $357,700,000.
Now according to Modigliani-Miller Proposition I, if a Levered firm and an identical Unlevered firm are not paying taxes, they should be of equal value.
This means that the Levered firm should have a value of $357,700,000 meaning that their equity should be that value minus the value of their debt.
= 357,700,000 - 74,000,000
= $283,700,000
$283,700,000 should be the value of their Equity going by the Modigliani-Miller Proposition I.
Calculating with their figures however gives,
= 3.2 million * 90
= $288,000,000
The market value of the Levered firm is more than it's value according to the Modigliani-Miller Proposition I.
This means that the Unlevered firm's Equity is UNDERVALUED and the Levered Firm's Equity is OVERVALUED.
