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?

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.