Question

Hanover Tech is currently an all-equity firm with a WACC of 15%. The firm has 320,000 shares of stock outstanding with a market price of $19 per share. The tax rate is 34%. The firm is considering borrowing $1.2 million at 10% and use the proceeds to repurchase shares.

Required:
What is the levered value of the equity after adding $1.2 million debt if we assume that the tax is the only market imperfection?

Answer 1

$5,288,000

Step-by-step explanation:

Calculation to determine the levered value of the equity

First step is to determine the VL

VL = (320,000 × $19) + (.34 × $1,200,000)

VL= $6,488,000

Now let calculate levered value of the equity

VE = $6,488,000 - 1,200,000

VE= $5,288,000

Therefore the levered value of the equity is $5,288,000