Question

DAR 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 155,000 shares of stock outstanding. Under Plan II, there would be 105,000 shares of stock outstanding and $1.33 million in debt outstanding. The interest rate on the debt is 6 percent and there are no taxes.

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.)

Share price $ per share

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 dollar amount, e.g., 32.)

All equity plan $

Levered plan $

Answer 1

Answer :

Calculation of Price per share

Price per share = Debt Value / Difference in number of shares under Plan I and Plan II

Debt Value = $1.33 million or 1,330,000

Number of shares in Plan I = 155,000

Number of shares in Plan II = 105,000

Price per share = 1,330,000 / (155,000 - 105,000)

= 1,330,000 / 50000

= $26.60 per share

Calculation of Value of Firm under each of the two proposed plans :

Value of Firm in All Equity Plan i.e Plan I = 155,000 shares * 26.60 per share

= $4,123,000

Value of Firm in Levered Plan i.e Plan II = (105,000 shares * 26.60 per share) + 1,330,000

= $2,793,000 + $1,330,000

= 4,123,000