Question

The Kolby Corporation compares two different capital structures: Plan I would result in 14,000 shares and $100,000 in debt, and Plan II would result in 10,800 shares and $180,000 in debt. The interest rate on the debt is 8} percent Assume EBIT is &225. A fully equity-funded plan would result in 18,000 shares outstanding. Ignore the taxes.

What is the price per share of partner capital under Plan I? And according to plan II? (Do not round intermediate calculations. Enter your answer to two decimal places, for example, 32.16.)

Answer 1

To calculate the price per share under Plan I, we subtract the interest expense from EBIT and divide by the number of shares, resulting in $15.50 per share. For Plan II, after a similar process, the price per share is $19.50.

Step-by-step explanation:

The student is asking how to calculate the price per share of partner capital under two different capital structure plans for Kolby Corporation, assuming an EBIT of $225 and ignoring taxes. Plan I comprises 14,000 shares and $100,000 in debt at an 8% interest rate, while Plan II has 10,800 shares and $180,000 in debt with the same interest rate.

Under Plan I, we first calculate the interest expense by multiplying the debt of $100,000 by the interest rate of 8%, which equals $8,000. Subtracting this from the EBIT of $225 leaves us with $217,000 ($225 - $8). We then divide this amount by the number of shares, 14,000, to find the price per share: $217,000 / 14,000 = $15.50 per share.

Under Plan II, the interest expense is $180,000 multiplied by 8%, equating to $14,400. After subtracting this from the EBIT, we get $210,600 ($225 - $14.4). Dividing this by 10,800 shares gives us a price per share of $19.50 ($210,600 / 10,800).