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23 February, 08:15

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

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  1. 23 February, 10:50
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    Question:

    What is the levered value of equity?

    Answer:

    Levered Value of Equity = $447,750

    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
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