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

Question

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 175,000 shares of stock outstanding. Under Plan , there would be 110,000 shares of stock outstanding and $2.33 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 answer to 2 decimal places, e.g., 32.16.) Share price 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

Explanation / Answer

1-

Market value of firm is independent to its capital structure

Value without debt = Value with some debt + value of equity of firm   (1)

Let the price per share = x

Plan 1: Value without debt = Total Shares * x

Total Shares = 0.175 million

=0. 175*x

Plan 2: (Equity + Debt)

=0.110*x +2.33

Using (1)

0.175x = 0.110 x +2.33

X = $35.8461

2- MM proposition 1 Value of firm is independent of capital structure

Value of Firm Plan 1 = Value of firm plan 2 = 175000 *35.8461 = $6,273,067

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