Kyle Corporation is comparing two different capital structures, an all-equity pl
ID: 2585867 • Letter: K
Question
Kyle Corporation is comparing two different capital structures, an all-equity plan (Plan I) and a levered plan (Plan II). Under Plan I, the company would have 770,000 shares of stock outstanding. Under Plan II, there would be 520,000 shares of stock outstanding and $9.5 million in debt outstanding. The interest rate on the debt is 8 percent, and there are no taxes.
Use M&M Proposition I to find the price per share of equity. (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)
Share price $
What is the value of the firm under Plan I? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, e.g., 1,234,567. Round your answer to the nearest whole number, e.g., 32.)
Value of the firm $
What is the value of the firm under Plan II? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, e.g., 1,234,567. Round your answer to the nearest whole number, e.g., 32.)
Explanation / Answer
Question - 1
Share price = Amount of debt replacing the common stock / No of shares reduced
= Amount paid for buy back / Number shares purchased = 9500,000 / 250000 = 38 per share ........final answer
Question - 2
What is the value of the firm under Plan I?
Value of all equity = Number of shares outstanding * value per share = 770,000 * 38 = 29,260,000.....final answer
Question - 3
value of firm under plan - II
= 520000 * 38 + 9500,000 = 29260000..............final answer
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