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Yasmin Corporation is comparing two different capital structures, an all- equity plan (Plan I) and a levered plan (Plan II). Under Plan I, Yasmin would have 141,000 shares of stock outstanding. Under Plan II, there would be 56,400 shares of stock outstanding and $ 1.222 million in debt outstanding. The interest rate on the debt is 10 percent and there are no taxes.
Using MM Proposition I, the price per share of equity under each of the two proposed plans is? The value of the firm is $$$ under Plan I, and $$$ under Plan II?
I am trying to calculate this but keep coming up with the wrong information…
Firstly, in future please ask a question like this in the Paper P4 Forum – Modigliani and Miller is examined at P4.
Secondly, you have not given enough information. Even if there is no gearing (i.e. Plan 1) it is impossible to calculate a share price without more information.
Since there are no taxes, then the total value of the firm will be the same in both cases.
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