The 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 percent and the tax rate is 34 percent.The firm is considering adding $1.25 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?
A)$2,535,000
B)$5,035,000
C)$3,785,000
D)$3,015,000
E)$4,015,000

Question

Quizplus · Accepted Answer

V_L = (80,000 × $42)+ (.34 × $1,250,000)= $3,785,000V_E = $3,785,000 - 1,250,000 = $2,535,000

The Studio Is Currently an All Equity Firm That Has