Question

American Corp. is currently an all-equity firm that has 22,000 shares of stock outstanding with a market price of $27 a share. The current cost of equity is 12 percent and the tax rate is 35 percent. The firm is considering adding $225,000 of debt with a coupon rate of 6.25 percent to its capital structure. The debt will sell at par. What will be the levered value of the equity

Answer 1

Answer: $447,750

Step-by-step explanation:

The value of a levered firm is calculated as:

= (Number of shares outstanding * Market price) + (Debt * tax rate)

= (22,000 * 27) + (225,000 * 35%)

= $672,750

Equity = Value of levered firm - Debt

= 672,750 - 225,000

= $447,750