Question
In: Finance
Byrd Corporation is comparing two different capital structures, an all-equity plan (Plan I) and a levered...
|
Byrd 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 175,000 shares of stock outstanding. Under Plan II, there would be 110,000 shares of stock outstanding and $2.33 million in debt outstanding. The interest rate on the debt is 6 percent and there are no taxes. |
| a. |
Use MM 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.) |
| b. | What is the value of the firm under each of the two proposed plans? ((Do not round intermediate calculations and enter your answers in dollars, not millions of dollars, rounded to the nearest whole number, e.g., 1,234,567.) |
Solutions
Expert Solution
Answer 1
All equity plan share Outstanding =
175000
levered (Plan II) no. of shares outstanding =
110000
Debt = 2330000
As per MM preposition I, Price per share formula= Amount of debt
issued/(No of shares in all Equity-no of shares in debt
plan)
2330000/(175000-110000)
35.84615385
So, price per share is $35.85
Answer 2:
Value of firm under Plan I = number of shares *price per
share
175000* 35.84615385
6273076.923
Value of firm under Plan II =(number of shares*price per
share)+Value of debt
(110000*35.84615385)+2330000
6273076.923
Value of firm under both plans is same that is
$6,273,076.92
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