Gulf Shores Inn is comparing two separate capital structures. The first structure consists of 275,000 shares of stock and no debt. The second structure consists of 222,000 shares of stock and $1.58 million of debt. What is the price per share of equity?

$38.53

$34.07

$31.23

$36.69

$29.81

Answer is $29.81.

In any of the two capital structures that the firm is considering, the overall value of capital would remain the same.

This means, mathematically, with shares of price P

Value of Firm in Capital Structure 1 = 275,000P

Value of Firm in Capital Structure 2 =222,000P + 1,580,000

Value of Firm in Capital Structure 1 = Value of firm in Capital structure 2

=> 275,000P = 222,000P + 1,580,000 (We need to find P)

=> 53,000P = 1,580,000

=> P = $29.811 (Option 5)