Coldstream Corp. is comparing two different capital structures. Plan I would result in 10,000 shares of stock and $64,000 in debt. Plan II would result in 5,625 shares of stock and $120,000 in debt. The interest rate on the debt is 10 percent. Assume that EBIT will be $70,000. An all-equity plan would result in 15,000 shares of stock outstanding. Ignore taxes. What is the price per share of equity under Plan I? Plan II? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) Price of equity Plan I $ per share Plan II $ per share
Cost of Capital
Shareholders and investors who invest into the capital of the firm desire to have a suitable return on their investment funding. The cost of capital reflects what shareholders expect. It is a discount rate for converting expected cash flow into present cash flow.
Capital Structure
Capital structure is the combination of debt and equity employed by an organization in order to take care of its operations. It is an important concept in corporate finance and is expressed in the form of a debt-equity ratio.
Weighted Average Cost of Capital
The Weighted Average Cost of Capital is a tool used for calculating the cost of capital for a firm wherein proportional weightage is assigned to each category of capital. It can also be defined as the average amount that a firm needs to pay its stakeholders and for its security to finance the assets. The most commonly used sources of capital include common stocks, bonds, long-term debts, etc. The increase in weighted average cost of capital is an indicator of a decrease in the valuation of a firm and an increase in its risk.
Coldstream Corp. is comparing two different capital structures. Plan I would result in 10,000 shares of stock and $64,000 in debt. Plan II would result in 5,625 shares of stock and $120,000 in debt. The interest rate on the debt is 10 percent. Assume that EBIT will be $70,000. An all-equity plan would result in 15,000 shares of stock outstanding. Ignore taxes.
What is the price per share of equity under Plan I? Plan II? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)
| Price of equity | |||
| Plan I | $ | per share | |
| Plan II | $ | per share | |
Trending now
This is a popular solution!
Step by step
Solved in 2 steps with 2 images
