Franklin Corporation is comparing two different capital structures, an all-equit

Question

Franklin 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 170,000 shares of stock outstanding. Under Plan II, there would be 120,000 shares of stock outstanding and $1.45 million in debt outstanding. The interest rate on the debt is 8 percent and there are no taxes.

Use MM 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.)

What is the value of the firm under each of the two proposed plans? (Enter your answers in dollars, not millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and round your answers to the nearest whole number, e.g., 32.)

Franklin 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 170,000 shares of stock outstanding. Under Plan II, there would be 120,000 shares of stock outstanding and $1.45 million in debt outstanding. The interest rate on the debt is 8 percent and there are no taxes.

Explanation / Answer

Price per share = Debt Outstanding/(Shares outstanding before debt + Shares outstanding after debt)

Debt = 1,450,000

Shares outstanding before debt = 170,000

Shares outstanding after debt = 120,000

Price per share = 1,450,000/(170,000 - 120,000)

Price per share = $29

2. All Equity Plan = Value of Firm = Price per share * NO. of shares outstanding = 29 * 170,000 = 4,930,000

Levered Plan = Price per share * NO. of shares outstanding + Value of debt = 29 * 120,000 + 1,450,000

Value of Firm = 3,480,000 + 1,450,000 = 4,930,000

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