Rolston Corporation is comparing two different capital structures, an all-equity
ID: 2639457 • Letter: R
Question
Rolston Corporation is comparing two different capital structures, an all-equity plan (Plan I) and a levered plan (Plan II). Under Plan I, Rolston would have 180,000 shares of stock outstanding. Under Plan II, there would be 130,000 shares of stock outstanding and $1.49 million in debt outstanding. The interest rate on the debt is 6 percent and there are no taxes.
Use MM Proposition I to find the price per share. (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16). Enter your answer in dollars, not millions of dollars, i.e. 1,234,567.)
What is the value of the firm under each of the two proposed plans? (Do not round intermediate calculations. Enter your answers in dollars, not millions of dollars, i.e. 1,234,567.)
Rolston Corporation is comparing two different capital structures, an all-equity plan (Plan I) and a levered plan (Plan II). Under Plan I, Rolston would have 180,000 shares of stock outstanding. Under Plan II, there would be 130,000 shares of stock outstanding and $1.49 million in debt outstanding. The interest rate on the debt is 6 percent and there are no taxes.
Explanation / Answer
Plan1 Plan2 No of Shares 180,000.00 130,000.00 Debt Nil 1,490,000.00 Since the Total Value would be same under both options therefore 50,000 shares would worth 1,490,000 Value Per Share 1,490,000/50,000 Value Per Share 29.80 No of Shares 180,000.00 130,000.00 Value Per share 29.80 29.80 Total Equity Capital 5,364,000.00 3,874,000.00 Debt Nil 1,490,000.00 Value of Firm 5,364,000.00 5,364,000.00
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