Destin Corp. is comparing two different capital structures. Plan I would result
ID: 2652156 • Letter: D
Question
Destin Corp. is comparing two different capital structures. Plan I would result in 11,000 shares of stock and $80,000 in debt. Plan II would result in 8,375 shares of stock and $150,000 in debt. The interest rate on the debt is 6 percent. Assume that EBIT will be $60,000. An all-equity plan would result in 14,000 shares of stock outstanding. Ignore taxes.
What is the price per share of equity under Plan I? Plan II? (Round your answers to 2 decimal places. (e.g., 32.16))
Destin Corp. is comparing two different capital structures. Plan I would result in 11,000 shares of stock and $80,000 in debt. Plan II would result in 8,375 shares of stock and $150,000 in debt. The interest rate on the debt is 6 percent. Assume that EBIT will be $60,000. An all-equity plan would result in 14,000 shares of stock outstanding. Ignore taxes.
Explanation / Answer
Answer:
Calculation of share price
Plan I
Plan II
EBIT
$ 60,000.00
$ 60,000.00
Less: Interest =Debt *6%
$ (4,800.00)
$ (9,000.00)
(80000*6%)
(150000*6%)
Net income
$ 55,200.00
$ 51,000.00
Number of shares
11000
8375
Earning Per share = Net income / Number of shares
$ 5.02
$ 6.09
Price of share = Earnings Per share * PE Ratio
Assuming PE ratio = 10
10
10
Hence Price of share =
$ 50.18
$ 60.90
Calculation of share price
Plan I
Plan II
EBIT
$ 60,000.00
$ 60,000.00
Less: Interest =Debt *6%
$ (4,800.00)
$ (9,000.00)
(80000*6%)
(150000*6%)
Net income
$ 55,200.00
$ 51,000.00
Number of shares
11000
8375
Earning Per share = Net income / Number of shares
$ 5.02
$ 6.09
Price of share = Earnings Per share * PE Ratio
Assuming PE ratio = 10
10
10
Hence Price of share =
$ 50.18
$ 60.90
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