Gulf Shores Inn is comparing two separate capital structures.The first structure consists of 64,000 shares of stock and no debt.The second structure consists of 50,000 shares of stock and $1.01 million of debt.What is the price per share of equity?
A)$75.50
B)$69.97
C)$72.14
D)$68.36
E)$74.00

Question

Quizplus · Accepted Answer

To find the price per share of equity, we need to determine the total value of the firm under each structure and then divide by the number of shares. Assuming the firm's value is the same under both structures, we can use the second structure to find the price per share. The total value of the firm with debt is the sum of the equity value and the debt value. If the equity value is $3.607 million (50,000 shares * $72.14), adding the debt of $1.01 million gives a total firm value of $4.617 million. Dividing this by the 64,000 shares in the first structure gives a price per share of $72.14.

Gulf Shores Inn Is Comparing Two Separate Capital Structures