hayleylatti1783 hayleylatti1783

20-08-2019
Business

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Bellwood Corp. is comparing two different capital structures. Plan I would result in 24,000 shares of stock and $82,500 in debt. Plan II would result in 18,000 shares of stock and $247,500 in debt. The interest rate on the debt is 4 percent. Assume that EBIT will be $85,000. An all-equity plan would result in 27,000 shares of stock outstanding. Ignore taxes. What is the price per share of equity under Plan I? Plan II?

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andromache andromache

28-08-2019

Answer:

The price per share of equity under Plan I and Plan II is $27.5 and $27.5 respectively.

Explanation:

For computing the price per share, following formula should be used which is shown below:

Price per share = Debt of plan ÷ (Equity plan - shares)

For Plan 1

Price per share = Debt of plan 1 ÷ (Equity plan - shares of plan 1)

= $82,500 ÷ (27,000 - 24,000)

= $82,500 ÷ 3,000

= $27.5

For Plan 2

Price per share = Debt of plan 2 ÷ (Equity plan - shares of plan 2)

= $247,500 ÷ (27,000 - 18,000)

= $247,500 ÷ 9,000

= $27.5

Hence, the price per share of equity under Plan I and Plan II is $27.5 and $27.5 respectively.

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