Foundation, Incorporated, 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 155,000 shares of stock outstanding. Under Plan II, there would be 105,000 shares of stock outstanding and $1.33 million in debt outstanding. The interest rate on the debt is 6 percent and there are no taxes. a. Use M&M 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.) b. What is the value of the firm under each of the two proposed plans? (Do not round intermediate calculations and round your answers to the nearest whole dollar amount, e.g., 32.)
Foundation, Incorporated, 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 155,000 shares of stock outstanding. Under Plan II, there would be 105,000 shares of stock outstanding and $1.33 million in debt outstanding. The interest rate on the debt is 6 percent and there are no taxes. a. Use M&M 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.) b. What is the value of the firm under each of the two proposed plans? (Do not round intermediate calculations and round your answers to the nearest whole dollar amount, e.g., 32.)
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Foundation, Incorporated, 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 155,000
shares of stock outstanding. Under Plan II, there would be 105,000 shares of stock
outstanding and $1.33 million in debt outstanding. The interest rate on the debt is 6
percent and there are no taxes.
a. Use M&M 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.)
b. What is the value of the firm under each of the two proposed plans? (Do not round
intermediate calculations and round your answers to the nearest whole dollar
amount, e.g., 32.)
a. Share price
b. All-equity firm value
b. Levered plan firm value
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