Rise Against Corporation is comparing two different capital structures, an all-e

Question

Rise Against Corporation is comparing two different capital structures, an all-equity plan (Plan I) and a levered plan (Plan II). Under Plan I, the company would have 185,000 shares of stock outstanding. Under Plan II, there would be 135,000 shares of stock outstanding and $2.29 million in debt outstanding. The interest rate on the debt is 5 percent and there are no taxes.

Use M&M Proposition I to find the price per share. (Round your answer to 2 decimal places. (e.g., 32.16))

What is the value of the firm under each of the two proposed plans? (Do not round intermediate calculations and round your final answers to the nearest whole dollar amount. (e.g., 32))

Rise Against Corporation is comparing two different capital structures, an all-equity plan (Plan I) and a levered plan (Plan II). Under Plan I, the company would have 185,000 shares of stock outstanding. Under Plan II, there would be 135,000 shares of stock outstanding and $2.29 million in debt outstanding. The interest rate on the debt is 5 percent and there are no taxes.

Explanation / Answer

m&m propostion states that, value of levered plan = value of ulevered plan

therefore, 185000*P = 135000*P + 2.29million, 50000P = 2.29mill, P = 45.8$ is share price.

value of firm will be same both in all equity plan and levered plan

value of firm = 185000*45.8 = $8.473 million

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