Gail's Dance Studio Is Currently an All Equity fiRm That

question 150

Multiple Choice

Gail's Dance 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% and the tax rate is 34%. Gail is
Considering adding $1 million of debt with a coupon rate of 8% to her capital structure. The debt will
Be sold at par value. What is the levered value of the equity?

• A) $2.4 million
• B) $2.7 million
• C) $3.3 million
• D) $3.7 million
• E) $3.9 million

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Definitions:

Reciprocity Norm

A social norm that dictates that we should treat others as they treat us, fostering mutual aid and cooperation.

Ethnic Groups

Communities or populations sharing common cultural traits, ancestry, language, history, and often a shared sense of identity.

Nationalities

are the distinct ethnic, cultural, or national identities that people belong to, often associated with being a citizen of a particular nation.

Superordinate Goals

Shared objectives that require cooperation and transcend individual or group conflicts.