Kyle Corporation is comparing two different capital structures, an all-equity pl
ID: 2796990 • 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, the company would have 710,000 shares of stock outstanding. Under Plan II, there would be 460,000 shares of stock outstanding and $6.5 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. (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)
Share price $
What is the value of the firm under Plan I? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, e.g., 1,234,567. Round your answer to the nearest whole number, e.g., 32.)
Value of the firm $
What is the value of the firm under Plan II? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, e.g., 1,234,567. Round your answer to the nearest whole number, e.g., 32.)
Value of the firm $
Explanation / Answer
a.
Price of equity = $6,500,000 / (710,000 - 460,000)
= $6,500,000 / 250,000
= $26
Price of equity is $26.
b.
Value of firm under Plan I = 710,000 × $26
= $18,460,000
Value of firm under plan I is $18,460,000.
c.
If there is no tax then value of firm under plan I and Plan II is similar.
Value of firm under Plan II = (460,000 × $26) + $6,500,000
= $11,960,000 + $6,500,000
= $18,460,000
Value of firm under Plan II is $18,460,000.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.