Yasmin Corporation is comparing two different capital structures, an all-equity

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 185,000 shares of stock outstanding. Under Plan II, there would be 135,000 shares of stock outstanding and $1.92 million in debt outstanding. The interest rate on the debt is 7 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).)

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 185,000 shares of stock outstanding. Under Plan II, there would be 135,000 shares of stock outstanding and $1.92 million in debt outstanding. The interest rate on the debt is 7 percent and there are no taxes.

Explanation / Answer

Value of the firm will be equal in both the moethods

Value in all equity = 185000*P

Value in levered = 135000*P + 1920000

1)

185000*P = 135000*P + 1920000

P = 1920000 / (185000 - 135000) = 38.4

2)

All equity plan = 185000*P = 185000*38.4 = 7104000

Levered plan = 135000*P + 1920000 = 135000*38.4 + 1920000 = 7104000

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