Question

Gail's Dance Studio is currently an all equity firm that has 80,000 shares of stock outstanding with a market price of $42 a share. The current cost of equity is 12% and the tax rate is 34%. Gail is considering adding $1 million of debt with a coupon rate of 8% to her capital structure. The debt will be sold at par value.

What is the levered value of the equity

Answer 1

Answer: the leveled value of equity is $2.7m

Step-by-step explanation:

VL=80,000x42+1mx0.34=3.7m

Ve=3.7m-1m=2.7m