Question

Franklin 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 185,000 shares of stock outstanding. Under Plan II, there would be 135,000 shares of stock outstanding and $1.92 million in debt outstanding. The interest rate on the debt is 7 percent and there are no taxes. Use MM Proposition I to find the price per share.

Answer 1

The correct answer is $38.40.

Step-by-step explanation:

According to the scenario, the computation of the given data are as follows:

Plan 1 shares = 185,000 shares

Plan 2 Shares = 135,000 shares

Debt = $1,920,000

So, we can calculate the price per share by using following formula:

Price per share = Debt ÷ ( Plan 1 shares - plan 2 shares)

= $1,920,000 ÷ ( 185,000 - 135,000)

= $1,920,000 ÷ 50,000

= $38.40