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

Question

Destin Corp. is comparing two different capital structures. Plan I would result in 15,000 shares of stock and $100,000 in debt. Plan II would result in 11,500 shares of stock and $170,000 in debt. The interest rate on the debt is 5 percent. Assume that EBIT will be $70,000. An all-equity plan would result in 20,000 shares of stock outstanding. Ignore taxes.

What is the price per share of equity under Plan 1? Plan l1? (Round your answers to 2 decimal places. Price per share of equity per share per share Plan I Plan II

Explanation / Answer

Price per share=dollar value of repurchase/no. of share repurchase

Dollar value of share repurchase=increase in the value of debt used to repurchase share

No. of share repurchase=decrease in share outstanding

Plan 1:

Dollar value of repurchase=$170,000-$100,000

=$70,000

No. of share repurchase=15000-11500

=3500 shares

Price per share=$70,000/3,500

=$20 per share

Plan 2:

Dollar value of repurchase=$170,000-0( in all equity plan debt is 0)

=$170,000

No. of share repurchase=20,000-11500

=8,500 shares

Price per share=$170,000/8,500

=$20 per share

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