Rise Against Corporation is comparing two different capital structures: an all-e

Question

Rise Against 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 210,000 shares of stock outstanding. Under Plan II, there would be 150,000 shares of stock outstanding and $2.28 million in debt outstanding. The interest rate on the debt is 8 percent, and there are no taxes.

USE M&M Proposition I to find the price per share.

Share Price= $

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

All equity plan= $

Levered plan= $

Explanation / Answer

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 find the share price is:

Share price = $2,280,000 / (210,000 – 150,000)

Share price = $38.00 per share

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

V= $38.00(210,000 shares)

V= $7,980,000

And the value of the company under the levered plan is:

V= $38.00(150,000 shares) + $2,280,000 debt

V= $7,980,000

Related Questions

Navigate

• Browse (All)
• Browse R
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.