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Alexandrias Dance Studio is currently an all equity firm that has

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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. $.24 million
b. $2.24 million
c. $1.12 million
d. $.12 million
e. $2.84 million
Solution
WACC = 144000/3440000 x 11% + 200000/3440000 x
4.20%
= 7.05%
Levered value of equity = $2million(1 + WACC)
= $2.24 Million
Thus answer will be b. $2.24 million.

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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. $.24 million b. $2.24 million c. $1.12 million d. $.12 million e. $2.84 million Solution WACC = 144000/3440000 x 11% + 2 00000/3440000 x 4.20% = 7.05% Levered value of equity = $2million(1 + WACC) = $2.24 Million Thus ...
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