Question

Gulf Shores Inn is comparing two separate capital structures. The first structure consists of 300,000 shares of stock and no debt. The second structure consists of 252,000 shares of stock and $1.78 million of debt. What is the price per share of equity?

Multiple choice

$42.38

$47.92

$38.85

$45.64

$37.08

Answer 1

Answer is $37.08

Plan I:

Number of shares = 300,000

Plan II:

Number of shares = 252,000
Debt = $1,780,000

Price per share = Debt under Plan II / (Number of shares under Plan I - Number of shares under Plan II)
Price per share = $1,780,000 / (300,000 - 252,000)
Price per share = $1,780,000 / 48,000
Price per share = $37.08

So, price per share of equity is $37.08