Cooke Co. is comparing two different capital structures. Plan I would result in

Question

Cooke Co. is comparing two different capital structures. Plan I would result in 8,700 shares of stock and $399,000 in debt. Plan II would result in 12,500 shares of stock and $239,400 in debt. The interest rate on the debt is 11 percent. The all-equity plan would result in 18,200 shares of stock outstanding. Ignore taxes for this problem.

Required: (a) What is the price per share of equity under Plan I?

Price per share ___

(b) What is the price per share of equity under Plan II?

Price per share ____

Explanation / Answer

Let the price per share be x.

a) In plan I, 8700x + 399000 = 18200x

9600x = 399000

x = $42

Price per share under Plan I = $42

b) In plan II, 12500x + 239400 = 18200x

5700x = 239400

x = $42

Price per share under Plan II = $42

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