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Leverage and Stock Value
Destin Corp. is comparing two different capital structures. Plan I would result in 10,000 shares of stock and $90,000 in debt. Plan II would result in 7,600 shares of stock and $198,000 in debt. The interest rate on the debt is 10 percent. Assume that EBIT will be $48,000. An all-equity plan would result in 12,000 shares of stock outstanding. Ignore taxes.
What is the price per share of equity under Plan I? Plan II?
Price per share of equity
Plan I $ per share
Plan II $ per share
What is one of the most important lessons from capital market history?
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