Question

Haskell Corp. is comparing two different capital structures. Plan I would result in 8,000 shares of stock and $80,000 in debt. Plan II would result in 6,000 shares of stock and $120,000 in debt. The interest rate on the debt is 6 percent. Assume that EBIT will be $50,000. 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? Plan II? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) Price per share of equity Plan I $ per share Plan II $ per share

Answer 1

All Equity Plan:

No. of Shares = 12,000

Plan I:
No. of Shares = 8,000
Total Debt = $80,000

No. of shares repurchase = 12,000 – 8,000
No. of Shares Repurchase = 4,000

So, Value of shares = Total Debt / No. of shares repurchase
Value of Shares = $80,000 / 4,000
Value of shares = $20

Plan II:

No. of Shares =6,000
Total Debt = $120,000

No. of shares repurchases = 12,000 – 6,000
No. of shares repurchases = 6,000

So, Value of shares = Total Debt / No. of shares repurchases
Value of Shares = $120,000 / 6,000
Value of Shares = $20