Problem 14-5 MM and Stock Value 3 Hale Corporation is comparing two different ca
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Question
Problem 14-5 MM and Stock Value 3 Hale Corporation is comparing two different capital structures, an all-equity plan (Plan () and a levered plan (Plan ID. Under Plan I the company would have 185,000 shares of stock outstanding. Under Plan I, there would be 135,000 shares of stock outstanding and $1.92 million in debt outstanding. The interest rate on the debt is 7 percent and there are no taxes nts Use MM Proposition I to find the price per share. (Do not round intermediate calculations and round your answer to 2 decimal Sieppedplaces, e.g., 32.16.) Share price What is the value of the firm under each of the two proposed plans? (Do not round intermediate calculations. Enter your answers in eBookdollers, not millions of dollars, e.g. 1,234,567.) All equity plan Levered plan Print References Reference links 14.5 Toses Prex 3 of 8 Next >Explanation / Answer
Solution: Share price $38.40 per share The value of the firm under each of the two proposed plans All equity plan $7,104,000 Levered plan $7,104,000 Working Notes: Share price $38.40 per share According to MM proposition I we can find share by dividing the debt used to purchase share with the number of shares repurchased. Share price = $1,920,000/(185,000 - 135,000) =$1,920,000/50,000 =$ 38.40 per share The value of the firm under each of the two proposed plans All equity plan $7,104,000 Levered plan $7,104,000 Now The value of the firm under all equity plan = No. of shares outstanding x share price per share = 185,000 x 38.40 =$7,104,000 The value of the firm under levered plan = (No. of shares outstanding x share price per share) + debt =135,000 x 38.40 + 1,920,000 =5,184,000 + 1,920,000 =7,104,000 Please feel free to ask if anything about above solution in comment section of the question.