Question

Bellwood Corp. is comparing two different capital structures. Plan I would result in 29,000 shares of stock and $90,000 in debt. Plan II would result in 23,000 shares of stock and $270,000 in debt. The interest rate on the debt is 5 percent. Assume that EBIT will be $110,000. An all-equity plan would result in 32,000 shares of stock outstanding. Ignore taxes.

What is the price per share of equity under Plan I? Plan II?

Answer 1

All-Equity Plan:

Number of shares = 32,000

Plan I:

Number of shares = 29,000
Value of debt = $90,000

Price per share = Value of debt / (Number of shares under All-Equity Plan - Number of shares under Plan I)
Price per share = $90,000 / (32,000 - 29,000)
Price per share = $90,000 / 3,000
Price per share = $30.00

Plan II:

Number of shares = 23,000
Value of debt = $270,000

Price per share = Value of debt / (Number of shares under All-Equity Plan - Number of shares under Plan II)
Price per share = $270,000 / (32,000 - 23,000)
Price per share = $270,000 / 9,000
Price per share = $30.00