Question

Trapper Corporation is comparing two different capital structures, an all-equity plan (Plan I) and a levered...

Trapper 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 200,000 shares of stock outstanding. Under Plan II, there would be 115,000 shares of stock outstanding and $1.75 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? (Do not round intermediate calculations and round your answers to the nearest whole number, e.g., 32.)

Homework Answers

Answer #1
a) Price per Share under M&M Proposition
= Amount of Debt Outstanding / (No of Shares under Plan I - No of Shares under Plan II)
= $1750000 / (200000-115000)
= $1750000 / 85000
= $20.59
b) Value of Firm under plan I
= No of Shares Outstanding * Price per Share
= 200000 * $20.59
= $4118000
Value of Firm under plan II
= (No of Shares Outstanding * Price per Share) + Amount of Debt
= (115000 * $20.59) + $1750000
= $2367850 + $1750000
= $4117850
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