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 10,000 shares of stock and $100,000 in debt. Plan II would result in 5,000 shares of stock and $200,000 in debt. The interest rate on the debt is 6 percent. Assume that EBIT will be $60,000. An all-equity plan would result in 15,000 shares of stock outstanding. Ignore taxes.

What is the price per share of equity under Plan I? Plan II?

Haskell Corp. is comparing two different capital structures. Plan I would result in 10,000 shares of stock and $100,000 in debt. Plan II would result in 5,000 shares of stock and $200,000 in debt. The interest rate on the debt is 6 percent. Assume that EBIT will be $60,000. An all-equity plan would result in 15,000 shares of stock outstanding. Ignore taxes.

Explanation / Answer

Plan 1

Compared to all equity, dollar value of repurcase in plan 1=additionaldebt=100000

Number of shres repurchaed=15000-10000=5000

Price per share=100000/5000=20

Plan 2

Compared to all equity, dollar value of repurcase in plan 2=additionaldebt=200000

Number of shres repurchaed=15000-5000=10000

Price per share=200000/10000=20

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