Haskell Corp. is comparing two different capital structures. Plan I would result

Question

Haskell Corp. is comparing two different capital structures. Plan I would result in 13,000 shares of stock and $100,000 in debt. Plan II would result in 10,500 shares of stock and $150,000 in debt. The interest rate on the debt is 10 percent. Assume that EBIT will be $90,000. An all-equity plan would result in 18,000 shares of stock outstanding. Ignore taxes.

What is the price per share of equity under Plan I? Plan II? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

Price per share of equity  Plan I$  per share    Plan II$  per share  

What is the price per share of equity under Plan I? Plan II? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

Price per share of equity  Plan I$  per share    Plan II$  per share  

Explanation / Answer

Plan I

The price per share would be the value of share repurchased divided by number of shares repurchased:

Price = Value of shares repurchased/ no. of shares repurchased

          = Amount of debt / (stocks outstanding without debt – stock outstanding under the plan)

          = 100,000 / ( 18,000 -13,000)

          = 100,000 / 5,000

           = 20

So price would be 20 dollars per share.

Plan II

The price per share would be the value of share repurchased divided by number of shares repurchased:

Price = Value of shares repurchased/ no. of shares repurchased

          = Amount of debt / (stocks outstanding without debt – stock outstanding under the plan)

          = 150,000 / ( 18,000 -10,500)

          = 150,000 / 7,500

           = 20

So price would be 20 dollars per share.

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