Kolby Corp. is comparing two different capital structures. Plan I would result i
ID: 2761275 • Letter: K
Question
Kolby Corp. is comparing two different capital structures. Plan I would result in 12,000 shares of stock and $100,000 in debt. Plan II would result in 8,700 shares of stock and $155,000 in debt. The interest rate on the debt is 5 percent. Assume that EBIT will be $80,000. An all-equity plan would result in 18,000 shares of stock outstanding. Ignore taxes.
What is the price per share of equity under Plan I? Plan II? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)
Price per share of equity
Plan I $ ? per share
Plan II $ ? per share
Kolby Corp. is comparing two different capital structures. Plan I would result in 12,000 shares of stock and $100,000 in debt. Plan II would result in 8,700 shares of stock and $155,000 in debt. The interest rate on the debt is 5 percent. Assume that EBIT will be $80,000. An all-equity plan would result in 18,000 shares of stock outstanding. Ignore taxes.
Explanation / Answer
Calculation of the price per share of equity under Plan I:
Share price = ($155,000 -$100,000) / (12,000 - 8,700)
=$55,000 / 3,300 shares
= $16.67 per share
Under plan I:
Capital structure = (12000 shares *16.67) + $100,000 debt
=$200,040 + $100,000
= 300,040
Under plan II:
Capital structure = (8,700 shares *16.67) + $150,000 debt
= $145,029 + $150,000
= $295,029
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