4 Franklin Corporation is comparing two different capital structures, an all-equ

Question

4 Franklin Corporation is comparing two different capital structures, an all-equity plan (Plan I) and a levered plan (Plan Il). Under Plan I, the company would have 205,000 shares of stock outstanding. Under Plan II, there would be 125,000 shares of stock outstanding and $1.73 million in debt outstanding. The interest rate on the debt is 8 percent and there are no taxes. Use MM 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 $21.63 What is the value of the firm under each of the two proposed plans? (Enter your answers in dollars, not millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and round your answers to the nearest whole number, e.g., 32.) All equity plan Levered plan $4,434,15 4433750

Explanation / Answer

All equity Plan:

shares out standing = 205000

Debt = 0

levered plan

shares out standing = 125000

Debt = 1730000

a)

So, by comparing both the plans,some of the shares were used to raise the debt from creditors,

(the difference between outstanding shares)*(share price) = 1730000

(205000-125000)*share price = 1730000

80000*share price = 1730000

share price = 1730000/80000 = $21.625 or $21.63

Ans: $21.63

b)

value of all equity plan = equity+debt = (205000 shares)*21.63+0 = $4434150

Value of levered plan = equity+debt = (125000 shares)*21.63 + 1730000 = $4433750

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