comparing two different capital structures, an all-equity plan (Plan I) and a le
ID: 2738270 • Letter: C
Question
comparing two different capital structures, an all-equity plan (Plan I) and a levered plan (Plan II). Under Plan I, Yasmin would have 200,000 shares of stock outstanding. Under Plan II, there would be 115,000 shares of stock outstanding and $1.75 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).) 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 (e.g., 1,234,567).) All equity plan $ Levered plan $
Explanation / Answer
Price per share = (Plan 2 Debt-Plan 1 Debt)÷(Plan 1 shares-Plan 2 shares)
= ($1,750,000-$0)÷(200,000-115,000)
= $20.59
Firm value under all equity plan:
= 200,000×$20.59
= $4,118,000
Firm value under levered plan:
= Value of unlevered+Tax×Debt
= $4,118,000+0%×1,750,000
= $4,118,000
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