Cooke Co. is comparing two different capital structures. Plan I would result in
ID: 2713994 • Letter: C
Question
Cooke Co. is comparing two different capital structures. Plan I would result in 9,000 shares of stock and $306,000 in debt. Plan II would result in 12,150 shares of stock and $198,900 in debt. The interest rate on the debt is 10 percent. The all-equity plan would result in 18,000 shares of stock outstanding. Ignore taxes for this problem.
What is the price per share of equity under Plan I?
What is the price per share of equity under Plan II?
Cooke Co. is comparing two different capital structures. Plan I would result in 9,000 shares of stock and $306,000 in debt. Plan II would result in 12,150 shares of stock and $198,900 in debt. The interest rate on the debt is 10 percent. The all-equity plan would result in 18,000 shares of stock outstanding. Ignore taxes for this problem.
Explanation / Answer
a) What is the price per share of equity under Plan I?
Plan I
Current Share Outstanding = 9000
Debt = 306000
All Equity Plan , Share Outstanding = 18000
Current Proportion of Equity Ratio = 9000/18000 = 50%
Current value of Equity = Debt /(1-Equity Ratio) * Equity Ratio
Current value of Equity = 306000/(1-50%) * 50%
Current value of Equity = 306000
Price per share = Current value of Equity /Current Share Outstanding
Price per share = 306000/9000
Price per share = $ 34
b) What is the price per share of equity under Plan II?
Plan II
Current Share Outstanding = 12150
Debt = 198900
All Equity Plan , Share Outstanding = 18000
Current Proportion of Equity Ratio = 12150/18000 = 67.50%%
Current value of Equity = Debt /(1-Equity Ratio) * Equity Ratio
Current value of Equity = 198900/(1-67.50%) * 67.50%
Current value of Equity = 413100
Price per share = Current value of Equity /Current Share Outstanding
Price per share = 413100/12150
Price per share = $ 34