Rolston Corporation is comparing two different capital structures, an all-equity

Question

Rolston Corporation is comparing two different capital structures, an all-equity plan (Plan I) and a levered plan (Plan II). Under Plan I, Rolston would have 165,000 shares of stock outstanding. Under Plan II, there would be 115,000 shares of stock outstanding and $1.43 million in debt outstanding. The interest rate on the debt is 8 percent and there are no taxes. Use MM Proposition I to find the price per share. (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16). Enter your answer in dollars, not millions of dollars, i.e. 1,234,567.) Share price _______ per share. What is the value of the firm under each of the two proposed plans? (Do not round intermediate calculations. Enter your answers in dollars, not millions of dollars, i.e. 1,234,567.) All equity plan Levered plan

Explanation / Answer

Share price:

= value of debt/(shares in plan I-shares in plan II)

= $1,430,000/(165,000-115,000)

= $28.60 per share

Value Of The Firm Under All Equity Plan

Value of the firm = value of debt + value of equity

=0+(165,000×$28.60)

=$4,719,000

Value Of The Firm Under Levered Plan

Value of the firm = value of debt + value of equity

=$1,430,000×(1-0%)+(115,000×$28.60)

=$4,719,000

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