Question

Hanover Tech is currently an all equity firm that has 320,000 shares of stock outstanding with a market price of $19 a share. The current cost of equity is 15.4 percent and the tax rate is 34 percent. The firm is considering adding $1.2 million of debt with a coupon rate of 8 percent to its capital structure. The debt will be sold at par value. 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:

The computation of levered value of the equity is shown below:-

Value = Equity + Debt

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

= $6,488,000

Value of the levered equity after adding $1.2 million debt = Value - Debt

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

= $5,288,000

Therefore for computing the Value of the levered equity after adding $1.2 million debt we simply applied the above formula.