Alexandria's Dance Studio is currently an all equity firm that has 60,000 shares of stock outstanding with a market price of $24 a share. The current cost of equity is 11% and the tax rate is 40%. Alexandria is considering adding $2 million of debt with a coupon rate of 7% to her capital structure. The debt will be sold at par value. What is the levered value of the equity?
A) $.12 million
B) $.24 million
C) $1.12 million
D) $2.24 million
E) $2.84 million

Question

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The Answer of Alexandria's Dance Studio is currently an all equity firm that has 60,000 shares of stock outstanding with a market price of $24 a share. The current cost of equity is 11% and the tax rate is 40%. Alexandria is considering adding $2 million of debt with a coupon rate of 7% to her capital structure. The debt will be sold at par value. What is the levered value of the equity?
A) $.12 million
B) $.24 million
C) $1.12 million
D) $2.24 million
E) $2.84 million

Alexandria's Dance Studio Is Currently an All Equity Firm That