DAR Corporation is comparing two different capital structures, an all-equity pla
ID: 2727157 • Letter: D
Question
DAR 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 195,000 shares of stock outstanding. Under Plan II, there would be 130,000 shares of stock outstanding and $2.35 million in debt outstanding. The interest rate on the debt is 7 percent and there are no taxes.
Use M&M Proposition I to find the price per share.
What is the value of the firm under each of the two proposed plans?
Use M&M Proposition I to find the price per share.
What is the value of the firm under each of the two proposed plans?
Explanation / Answer
EBIT under plan 1 = EBIT under plan 2
X/195000 = (X-164500)/130000
195000(X-164500) = 130000X
195000X -195000*164500 = 130000X
65000X= 195000*164500
X = 493500
IF ebit is less than or equal to 493500 plan 1 is better
IF ebit is more than 493500 plan 2 is better
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