Problem 16-5 M and M and Stock Value [LO1] DAR Corporation is comparing two diff

Question

Problem 16-5 M and M and Stock Value [LO1] DAR Corporation is comparing two different capital structures, an all-equity plan (Plan I) and a levered plan (Plan Il). Under Plan I, the company would have 205,000 shares of stock outstanding. Under Plan lI, there would be 155,000 shares of stock outstanding and $2.17 million in debt outstanding. The interest rate on the debt is 6 percent and there are no taxes. Use M&M; Proposition 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 Hints References eBook & Resources Hint #1

Explanation / Answer

Price per share is dividing the amount of debt by the number of shares repurchased

= 2170000/205000-155000 = 43.4

Value of company under

equity plan = 43.4*205000 = 8897000

levered plan = 43.4*155000+2170000 = 8897000

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