Question

Kolby Corp. is comparing two different capital structures. Plan I would result in 15,000 shares of stock and $100,000 in debt. Plan II would result in 11,500 shares of stock and $170,000 in debt. The interest rate on the debt is 5 percent. Assume that EBIT will be $70,000. An all-equity plan would result in 20,000 shares of stock outstanding. Ignore taxes. What is the price per share of equity under Plan I? Plan II?

Answer 1

Price per share of equity under Plan I

The Price per share = The value of shares repurchased / The number of shares repurchased

The value of shares repurchased = Debt in Plan II – Debt in Plan I

= $170,000 - $100,000

= $70,000

The Number of shares repurchased = The number of stocks in Plan I – The number of stocks in Plan II

= $15,000 Shares – 11,500 Shares

= 3,500 Shares

Therefore, the Price per share = The value of shares repurchased / The number of shares repurchased

= $70,000 / 3,500 Shares

= $20.00 per share

Price per share of equity under Plan II

The Number of shares repurchased = The number of stocks outstanding in all-equity plan - The number of stocks in Plan II

= 20,000 Shares – 11,500 Shares

= 8,500 Shares

The Price per share = Debt in Plan II / Shares repurchased

= $170,000 / 8,500 Shares

= $20.00 per share

“The price per share of equity under Plan I = $20.00 per share”

“The price per share of equity under Plan II = $20.00 per share”