Yasmin Corporation is comparing two different capital structures, an all-equity
ID: 2731472 • Letter: Y
Question
Yasmin Corporation is comparing two different capital structures, an all-equity plan (Plan I) and a levered plan (Plan II). Under Plan I, Yasmin would have 175,000 shares of stock outstanding. Under Plan II, there would be 125,000 shares of stock outstanding and $1.47 million in debt outstanding. The interest rate on the debt is 5 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).)
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 (e.g., 1,234,567).)
Explanation / Answer
Price per share = (Plan 2 Debt-Plan 1 Debt)÷(Plan 1 shares-Plan 2 shares)
= ($1,470,000-$0)÷(175,000-125,000)
= $29.40 per share
Value of firm = Value of equity+Value of debt
All equity plan:
= $29.40×175,000
= $5,145,000
Levered plan:
= $29.40×125,000+$1,470,000
= $5,145,000
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