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Rolston Corporation is comparing two different capital structures, an all-equity plan (Plan I) and a levered plan (Plan II). Under Plan I, Rolston would have
Rolston Corporation is comparing two different capital structures, an all-equity plan (Plan I) and a levered plan (Plan II). Under Plan I, Rolston would have 165,000 shares of stock outstanding. Under Plan II, there would be 115,000 shares of stock outstanding and $1.43 million in debt outstanding. The interest rate on the debt is 8 percent and there are no taxes. Use MM Proposition I to find the price per share. What is the value of the firm under each of the two proposed plans? Share price: All equity plan: Levered plan:
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