Hale Corporation is comparing two different capital structures, an all-equity plan (Plan I) and a levered...
Hale 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 180,000 shares of stock outstanding. Under Plan II, there would be 130,000 shares of stock outstanding and $2.27 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.
What is the value of the firm under each of the two proposed plans?
a) all equity plan
b) levered plan
Homework Answers
a) From the description (180,000-130,000) shares = 2.27
million
Value of 50,000 shares = 2..27 million
Value of 180,000 shares = 2.27*180,000/50,000 = 8.172 million
Value of firm = 8.172 million
Price per share = 8,172,000/180,000 = 45.4
b) Value of Levered firm = Value of unlevered form if there are no
taxes = 8.172
Price per share of Levered firm = (8,172,000-2,270,000)/130,000 =
45.4
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