Question

Kolby Corp. is comparing two different capital structures. Plan I would result in 900 shares of stock and $65,700 in debt. Plan II would result in 1,900 shares of stock and $29,200 in debt. The interest rate on the debt is 10 percent. Assume that EBIT will be $8,500. An all-equity plan would result in 2,700 shares of stock outstanding. Ignore taxes. What is the price per share of equity under Plan I? Plan II?

Answer 1

In Plan I, the price per share of equity is $56.33. In Plan II, the price per share of equity is $32.03.

Step-by-step explanation:

In Plan I, there are 900 shares of stock and $65,700 in debt. In Plan II, there are 1,900 shares of stock and $29,200 in debt. To find the price per share of equity under each plan, we need to calculate the value of equity for each plan and divide it by the number of shares.

In Plan I, the value of equity is calculated as: Number of shares x Price per share = 900 shares x Price per share. The price per share can be found by subtracting the debt from the total value of the firm and dividing it by the number of shares. So, Price per share = (Total value of the firm - Total debt) / Number of shares = (EBIT - Debt) / Number of shares. Plugging in the numbers, Price per share = ($8,500 - $65,700) / 900 shares.

In Plan II, the value of equity is calculated in the same way: Number of shares x Price per share = 1,900 shares x Price per share. Price per share = (EBIT - Debt) / Number of shares = ($8,500 - $29,200) / 1,900 shares.

Calculating the values gives:

• Price per share under Plan I: $56.33
• Price per share under Plan II: $32.03