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 705,000 shares of stock outstanding. Under Plan II, there would be 455,000 shares of stock outstanding and $6.25 million in debt outstanding. The interest rate on the debt is 11 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 705,000 shares of stock outstanding. Under Plan II, there would be 455,000 shares of stock outstanding and $6.25 million in debt outstanding. The interest rate on the debt is 11 percent, and there are no taxes.

Explanation / Answer

plan1 shares outstanding 705000 share price                     80.59 vale of firm    56,818,181.82 plan2 shares outstanding 455000 value of firm    50,568,181.82 Debt outstanding      6,250,000.00 interest rate on debt 11% value of company    56,818,181.82

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