Hale Corporation is comparing two different capital structures, an all-equity pl
ID: 2801314 • Letter: H
Question
Hale 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 195,000 shares of stock outstanding. Under Plan II, there would be 130,000 shares of stock outstanding and $2.35 million in debt outstanding. The interest rate on the debt is 7 percent and there are no taxes.
Use MM Proposition I to find the price per share. (Do not round intermediate calculations and 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 under plan 1 = Plan 1 Debt÷(All equity shares-Plan 1 shares)
= $2,350,000/(195,000-130,000)
= $2,350,000/65,000
= $36.15
Value of levered firm:
= 195,000*$36.15
= $7,049,250
Value of unlevered firm:
same as above since tax rate is Nil. i.e $7,049,250
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.