Question

Honeycutt Co. is comparing two different capital structures. Plan I would result in 12,700 shares of stock and $109,250 in debt. Plan II would result in 9,800 shares of stock and $247,000 in debt. The interest rate on the debt is 10 percent. The all-equity plan would result in 15,000 shares of stock outstanding. Ignore taxes for this problem. a. What is the price per share of equity under Plan I

Answer 1

Answer: $47.50

Explanation:

The price pr share given debt and the number of shares if the company had both an all equity structure and a mixed structure can be expressed as;

Price per Share = Debt Value / (Number of Shares under All-equity plan - Number of shares under mixed plan)

Price per share = 109,250 / (15,000 - 12,700)

= 109,250 / 2,300

= $47.50