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 745,000 shares of stock outstanding. Under Plan II, there would be 495,000 shares of stock outstanding and $8.25 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. (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            $

Answer 1

a.

Using M&M Proposition I to find the price per share of equity is calculated below:

Price per share = $8,250,000 / (745,000 - 495,000)

= $8,250,000 / 250,000

= $33

Using M&M Proposition I to find the price per share of equity is $33.

b.

Number of share outstanding inder plan I = 745,000

Value of the firm under Plan I = 745,000 × $33

= $24,585,000

Value of the firm under Plan I is $24,585,000.

c.

Number of share outstanding inder plan II = 495,000

Value of debt = $8,250,0000

Value of the firm under Plan II = (495,000 × $33) + $8,250,000

= $16,335,000 + $8,250,000

= $24,585,000

Value of the firm under Plan II is $24,585,000.