Round Hammer is comparing two different capital structures: An all-equity plan (Plan l) and a levered plan (Plan Il). 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. a. Use M&M 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.) b. What is the value of the firm under each of the two proposed plans?

Question

Business

River Kent

13 September, 07:14

Round Hammer is comparing two different capital structures: An all-equity plan (Plan l) and a levered plan (Plan Il). 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. a. Use M&M 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.) b. What is the value of the firm under each of the two proposed plans?

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Phoenix Mullins · Answer 1

A). The computation of price per share is shown below:-

Debt outstanding : (Stock outstanding of Plan 1 - Stock outstanding of

Plan 2)

= $1,730,000 : (205,000 - 125,000)

= $21.63 per share

B a.) Under equity plan the value is

= Debt outstanding * Stock outstanding of Plan 1

= $21.63 * 205,000 shares

= $4,433,125

B b.) under the levered plan the value is

Price per share * Stock outstanding of Plan 2 + Debt outstanding

= $21.63 * 125,000 shares + $1,730,000

= $2,703,125 + $1,730,000

= $4,433,125