Problem 13-5 [LO 1] Kyle Corporation is comparing two different capital structur
ID: 2689266 • Letter: P
Question
Problem 13-5 [LO 1]
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 755,000 shares of stock outstanding. Under Plan II, there would be 505,000 shares of stock outstanding and $8.75 million in debt outstanding. The interest rate on the debt is 7 percent, and there are no taxes.
Use M&M Proposition I to find the price per share of equity?(Do not include the dollar sign ($).)
What is the value of the firm under Plan I?(Do not include the dollar sign ($). Enter your answer in dollars, not millions of dollars (e.g., 1,234,567).)
What is the value of the firm under Plan II?(Do not include the dollar sign ($). 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 755,000 shares of stock outstanding. Under Plan II, there would be 505,000 shares of stock outstanding and $8.75 million in debt outstanding. The interest rate on the debt is 7 percent, and there are no taxes.
Explanation / Answer
755000X = 505000x + 8750000 (Value of unlevered - value of levered( 250000X - 8750000 X = 35 Value of Plan A = 35*755000 = 26425000 Value of Plan B = 505000*35 + 8750000 = 26425000