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 23 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

$420,750

Step-by-step explanation:

The Dance Studio

(Shares of stock outstanding × market price share) +(tax rate×debt)

VL= (22,000 × $27) + (.23 × $225,000)

VL=$594,000+$51,750

= $645,750

VE= $645,750– 225,000

= $420,750

Therefore the levered value of the equity will be $420,750