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

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 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.

(Plan II). Under Plan , the company 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 M&M; 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 per share What is the value of the firm under each of the two proposed plans? (Do not round intermediate calculations and round your answers to the nearest whole dollar amount, e.g., 32.) All equity plan Levered plan

Explanation / Answer

DAR Corporation We can find the price per share by dividing the amount of debt used to repurchase shares by the number of shares repurchased. Doing so, we find the share price is: Share price = 1,920,000/(185,000 – 1,35,000) = $ 38.4 The value of the company under the all-equity plan is: V = $ 38.40 (185,000 shares) = $ 7104000 And the value of the company under the levered plan is: V = $ 38.40 (135,000 shares) + $ 1,920,000 debt = $7,104,000

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