Question

Byrd Corp is comparing two different capital structures, and 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 125,000 shares of stock outstanding and 2.23 million in debt outstanding. The interest rate on the debt is 8 percent and there are no taxes.

a. USE MM Proposition I to find price per share.

b, What is the value of the firm under each of the two proposed plans?

a Share Price

a	Share Price
b	All Equity Plan
	Levered Plan

b All Equity Plan Levered Plan

Answer 1

Solution:- Given in Question-

Outstanding shares (Under Plan I) = 1,75,000 shares

Outstanding shares (Under Plan II) = 1,25,000 shares

Debt Outstanding (Under Plan II) = $2.23 Million

To Calculate Price per share using M&M Proposition-

Price Per share =

Price Per share =

Price Per share = $44.60

To Calculate Value of the firm under each of the two proposed plans -

Part A

Share Price = $44.60

Number of shares outstanding = 1,75,000 shares

Value of Firm = Share Price * Number of shares outstanding

Value of Firm = $44.60 * 1,75,000 share

Value of Firm = $7.805 Million

Part B

Share Price = $44.60

Number of shares outstanding = 1,25,000 shares

Debt Outstanding = $2.23 Million

Value of Firm = Share Price * Number of shares outstanding + Debt Outstanding

Value of Firm = $44.60 * 1,25,000 share + $2.23 Million

Value of Firm = $7.805 Million

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