The Studio Is Currently an All-Equity Firm That Has 68,000

question 1

Multiple Choice

The Studio is currently an all-equity firm that has 68,000 shares of stock outstanding with a market price of $36.80 a share.The current cost of equity is 11.7 percent,and the tax rate is 35 percent.The firm is considering adding $750,000 of debt with a coupon rate of 5.8 percent to its capital structure.The debt will be sold at par value.What is the levered value of the equity?

• A)$2,014,900
• B)$3,035,500
• C)$1,785,000
• D)$2,005,200
• E)$1,806,400

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Definitions:

Expected Rate

An anticipated return on investment, often based on historical data or forecast models, that investors use to make decisions.

Interest Rate

The amount charged by a lender to a borrower for the use of assets as a percentage of the principal.

Profit

Profit denotes the financial gain achieved when the amount of revenue gained from a business activity exceeds the expenses, costs, and taxes needed to sustain the activity.

Capital Goods

Long-lasting goods acquired or created by businesses to produce other goods or services, including machinery, buildings, and equipment.