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

question 35

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:

Hippocampus

a part of the brain involved in the formation of new memories and is associated with learning and emotions.

Stereotype Threat

The risk of confirming negative stereotypes about one's group, which can have a detrimental effect on performance and behavior.

Stereotype Lift

A phenomenon wherein individuals from non-stereotyped groups perform better in situations where their counterparts are negatively stereotyped.

Stigma Consciousness

The awareness or sensitivity to the stigma one might face based on an attribute, identity, or status, affecting how one navigates social interactions and perceives oneself.