Question

The Dance Studio 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

Answer 1

Question:

What is the levered value of equity?

Answer:

Levered Value of Equity = $447,750

Step-by-step explanation:

Given

Current Stock = 22000 shares

Market Price = $27

Equity Cost = 12%

Tax rate = 35%

Debt = $225,000

Coupon Rate = 6.25%

Calculating Current Value

Current Value = (22000 * $27) + ($22500 * 35%)

Current Value = (22000 * $27) + ($225000 * 0.35)

Current Value = $672,750

Leverred Value of Equity = $672,750 - $225,000

Levered Value of Equity = $447,750