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 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. (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

• The price per share of equity is $ 25 per share.
• The value of the firm under Plan I is $17625000.
• The value of the firm under Plan II is 17625000.

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