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Trapper Corporation is comparing two different capital structures, an all-equity plan (Plan I) and a levered plan (Plan II)
Trapper 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 165,000 shares of stock outstanding. Under Plan II, there would be 115,000 shares of stock outstanding and $1.43 million in debt outstanding. The interest rate on the debt is 8 percent and there are no taxes.
a.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.)
b.What is the value of the firm under each of the two proposed plans
Expert Solution
a.)
Plan I;
Equity shares= 165000
Value of firm= 165000(X)
Plan II;
Equity shares= 115000
Debt= 1430000
Value of firm= 115000(X)+ 1430000
Plan I= Plan II (because when taxes are not given, value of levered and unlevered firm is equal)
So,
165000(X)= 115000(X)+ 1430000
50000(X)= 1430000
X= 1430000/ 50000
= 28.6
So, Share price is $28.6
b.)
Value of all equity plan= Price per share* No. of equity shares
= 28.6* 165000
= 4719000
Value of levered plan= (Price per shares* No. of equity shares)+ Debt
= (28.6* 115000)+ 1430000
= 4719000
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