Question

DAR 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 160,000 shares of stock outstanding. Under Plan II, there would be 110,000 shares of stock outstanding and $1.41 million in debt outstanding. The interest rate on the debt is 7 percent and there are no taxes. Use M&M 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.) Share price $ per share What is the value of the firm under each of the two proposed plans? (Do not round intermediate calculations and round your answers to the nearest whole dollar amount, e.g., 32.)

Answer 1

Answer:

a) Share price of company is $28.20.

b) So value of unlevered firm is $4.512 million.

Explanation:

a.

Share price = Value of debt / (160,000 - 110,000)

= $1,410,000 / 50,000

= $28.20

Share price of company is $28.20.

b.

VAlue of all equity firm = Number of share outstanding × Price per share

= 160,000 × $28.20

= $4.512 million

Value of levered firm is $4.512 million.

Since tax rate is zero, so value of levered firm equal to value of unlevered firm.

So value of unlevered firm is $4.512 million.