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 205,000 shares of stock outstanding. Under Plan II, there would be 125,000 shares of stock outstanding and $1.73 million in debt outstanding. The interest rate on the debt is 8 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)) Share price $ per share What is the value of the firm under each of the two proposed plans?

Explanation / Answer

Price per share = (Plan 2 Debt-Plan 1 Debt)÷(Plan 1 shares-Plan 2 shares)

= ($1,730,000-$0)÷(205,000-125,000)

= $21.63

Value of firm:

As there is no taxes, value of firm under both plans will be same.

i.e. $21.63×205,000 = $4,433,125

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