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 170,000 shares of stock outstanding. Under Plan II, there would be 120,000 shares of stock outstanding and $2.21 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?

Answer 1

Answer:

Value of firm in levered plan = $4,930,000

Explanation:

We can find the price per share by dividing the amount of debt used to repurchase shares by the number of shares repurchased. Doing so we get the share price:

Share price = $1,450,000 / (170,000 -120,000)

Share price = $29

Now the value of firm in all equity plan = $29 x 170,000 = $4,930,000

Value of firm in levered plan = $29 x 120,000 + $1,450,000

Value of firm in levered plan = $4,930,000