Question

M&M and Stock Value in problem 4 Round hammer is comparing two different capital structures: an all-equity plan (plan 1) and a levered plan (plan 2). Under plan 1, the company would have 205,000 shares of stock outstanding. Under plan 2, there would be 155,000 shares of stock outstanding and $3.1 million in debt outstanding. The interest rate on the debt is 8 percent, and there are no taxes. A) if EBIT is $600,000, what is the EPS for each plan? (Do not round intermediate calculations and round your answers to 2 decimal places) B) if EBIT is $850,000, what is the EPS for each plan? (Do not round intermediate calculations and round your answers to 2 decimal places). C) what is the break even EBIT? (Do not round intermediate calculations. Enter your answer in dollars, not in millions of dollars).

Answer 1

Answer:

Check the explanation

Explanation:

a). We can calculate the price per share by dividing the total sum of debt  that was used to repurchase shares by the number of shares repurchased. Doing so, we find the share price is:

Share Price = $3,100,000 / (205,000 - 155,000)

= $3,100,000/50,00 = $62 per share

b1). The value of the company under the all-equity plan is:

V = $62(205,000 shares) = $12,710,000

c). And the value of the company under the levered plan is:

V = $62(155,000 shares) + $12,710,000 debt

= $9,610,000 + $12,710,000 = $22,320,000