Cooke Co. is comparing two different capital structures. Plan I would result in
ID: 2635576 • Letter: C
Question
Cooke Co. is comparing two different capital structures. Plan I would result in 10,000 shares of stock and $310,000 in debt. Plan II would result in 13,000 shares of stock and $217,000 in debt. The interest rate on the debt is 10 percent. The all-equity plan would result in 20,000 shares of stock outstanding. Ignore taxes for this problem (a) What is the price per share of equity under Plan I? (b) What is the price per share of equity under Plan II?
*HINT: solve for Plan 1 by taking the debt amount and dividing by the difference in the all-stock less plan1 shares.*
Explanation / Answer
Plan 1 :
Equity =10,000 shares
Debt =310,000 @10%
Plan 2
Equity =13,000 shares
Debt =217,000@10%
Plan 2
All Equity = 20,000
a.
Difference in Equity Share between plan 1 and plan 3 = 20,000-10,000 = 10,000
Plan 1 has debt of 310,000 which is equivalent to 10,000 shares
Thus share price = 310,000/10,000 =31
b.
Difference in Equity Share between plan 2 and plan 3 = 20,000-13,000 = 7,000
Plan 1 has debt of 217,000 which is equivalent to 7,000 shares
Thus share price = 217,000/7,000 =31