Kyle Corporation is comparing two different capital structures, an all-equity pl
ID: 2721899 • 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 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. 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
1) Value of the share = $6250000/250000 shares = $25.
Value of a firm under MM1 with no taxes is the same for levered and unlevered firm.
$6250000 of debt is equivalent to the value of 705000 - 455000 = 250000 shares.
2) Value of the firm under Plan 1 = Value of equity = 705000 shares * $25 = $17,625,000
3) Value of the firm under Plan 2 = Value of equity = 455000*25 = $11,375,000
Value of debt = 6,250,000
Value of firm = 17,625,000
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.