Kyle Corporation is comparing two different capital structures, an all-equity pl
ID: 2720285 • 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 725,000 shares of stock outstanding. Under Plan II, there would be 475,000 shares of stock outstanding and $7.25 million in debt outstanding. The interest rate on the debt is 11 percent, and there are no taxes. Requirement 1: Use M&M Proposition I to find the price per share of equity. Share price $ Requirement 2: 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).) Value of the firm $ Requirement 3: 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).) Value of the firm $
Explanation / Answer
725000X = 475000x + 7250000 (Value of unlevered - value of levered(
250000X = 7250000
X = 7250000/250000 = 29
Value of Plan A = 29*725000 = 21,025,000
Value of Plan B = 475,000*29 + 7250000 = 21,025,000
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