Kyle Corporation is comparing two different capital structures, an all-equity pl
ID: 2671025 • 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, Kyle would have 700,000 shares of stock outstanding. Under Plan II, there would be 450,000 shares of stock outstanding and $6 million in debt outstanding. The interest rate on the debt is 10 percent, and there are no taxes.
Requirement 1:
Use M&M Proposition I to find the price per share of equity. (Do not include the dollar sign ($).)
Share price $
Requirement 2:
What is the value of the firm under Plan I? (Do not include the dollar sign ($). Enter your answer in dollars, not millions of dollars (e.g., 1,234,567).)
Value of the firm $
Requirement 3:
What is the value of the firm under Plan II? (Do not include the dollar sign ($). Enter your answer in dollars, not millions of dollars (e.g., 1,234,567).)
Value of the firm $
Explanation / Answer
755000X = 505000x + 8750000 (Value of unlevered - value of levered( 250000X - 8750000 X = 35 Value of Plan A = 35*755000 = 26425000 Value of Plan B = 505000*35 + 8750000 = 26425000
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