Kyle Corporation is comparing two different capital structures, an all-equity pl

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 730,000 shares of stock outstanding. Under Plan II, there would be 480,000 shares of stock outstanding and $7.5 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.

What is the value of the firm under Plan I? (Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars (e.g., 1,234,567).)

What is the value of the firm under Plan II? (Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars (e.g., 1,234,567).)

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 730,000 shares of stock outstanding. Under Plan II, there would be 480,000 shares of stock outstanding and $7.5 million in debt outstanding. The interest rate on the debt is 8 percent, and there are no taxes.

Explanation / Answer

Requirement 1:

We can find the price per share by dividing the amount of debt used to repurchase shares by the

number of shares repurchased. Doing so, we find the share price is:
Share price = $7.5*1000000/(730,000 – 480,000)

Share price = $30.00 per share

Requirement 2:

The value of the company under the all-equity plan 1 is:
V = $30*(730,000 shares) = $21,900,000

Requirement 3:

And the value of the company under the levered plan 2 is:
V = $30(480,000 shares) + $7,500,000 debt = $21,900,000

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