Question

Franklin 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 185,000 shares of stock outstanding. Under Plan II, 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.
Use MM 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.)
Share price $
What is the value of the firm under each of the two proposed plans? (Enter your answers in dollars, not millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and round your answers to the nearest whole number, e.g., 32.)
All equity plan $
Levered plan $

Answer 1

Answer:

The price per share using MM Proposition I is $38,40

The value of the firm under each of the two proposed plans is $7,104,000

Explanation:

In order to calculate the price per share using MM Proposition I we would have to use the following formula:

share price=Debt/Difference in number of shares

share price=1,920,000/(185,000-135,000)

share price=$38,40

The price per share using MM Proposition I is $38,40

In order to calcuate the value of the firm under each of the two proposed plans we would have to calculate the following formulas:

All equity plan=share price×number of shares

All equity plan=185,000×$38,40

All equity plan=$7,104,000

Levered plan=share price×number of shares+debt

Levered plan=115,000×$20.59+$175,000

Levered plan=$7,104,000

The value of the firm under each of the two proposed plans is $7,104,000