Question

Destin Corp. is comparing two different capital structures. Plan-I would result in 10,000 shares of stock and $90,000 in debt. Plan II would result in 7, 600 shares of stock and $198,000 in debt. The interest rate on the debt is 10 percent. Assume that EBIT will be $48,000. An all- equity plan would result in 12,000 shares of stock outstanding. Ignore taxes.

What is the price per share of equity under Plan-I and Plan II.

Plan-I =
Plan II=

Answer 1

To find the value per share of the stock under each capitalization plan, we can calculate the price as the value of shares repurchased divided by the number of shares repurchased. The dollar value of the shares repurchased is the increase in the value of the debt used to repurchase shares, or:

Dollar value of repurchase = $198,000 – 90,000

Dollar value of repurchase = $108,000

The number of shares repurchased is the decrease in shares outstanding, or:

Number of shares repurchased = 10,000 – 7,600

Number of shares repurchased = 2,400 shares

So, under Plan I, the value per share is:

P= $108,000 / 2,400

P= $45 per share

And under Plan II, the number of shares repurchased from the all equity plan by the $198,000 in debt is:

Shares repurchased = 12,000 – 7,600

Shares repurchased = 4,400

And under Plan II, the value per share is:

P= $198,000 / 4,400

P= $45 per share