Question

Haskell Corp. is comparing two different capital structures. Plan I would result in 12,000 shares of stock and $100,000 in debt. Plan II would result in 4,000 shares of stock and $200,000 in debt. The interest rate on the debt is 8 percent. Assume that EBIT will be $70,000. An all-equity plan would result in 20,000 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

Plan I:

Change in number of shares from plan I to Plan II would represent the value of debt purchased to substitute the equity hence, we can use below formula to get value of equity for Plan I:

Price per share equity = (Debt value in Plan II - Debt value in Plan I)/(Quantity of equity Plan I – Quantity of equity Plan II)

Price per share equity = (200000 - 100000)/(12000 - 4000)

Price per share equity = $12.50

Plan II:

The change in number of shares for all in equity from Plan II would represent the purchase of debt of 200000. Hence, we get value of per equity for Plan II from below formula:

Price per share equity = Debt value in Plan II/(Quantity for all in equity - Quantity of equity Plan II)

Price per share equity = 200000 /(20000 - 4000)

Price per share equity = $12.50