Hanover Tech Is Currently an All Equity Firm That Has

question 29

Multiple Choice

Hanover Tech is currently an all equity firm that has 320,000 shares of stock outstanding with a market price of $19 a share.The current cost of equity is 15.4 percent and the tax rate is 34 percent.The firm is considering adding $1.2 million of debt with a coupon rate of 8 percent to its capital structure.The debt will be sold at par value.What is the levered value of the equity?

• A)$5.209 million
• B)$5.288 million
• C)$5.312 million
• D)$6.512 million
• E)$6.708 million

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Definitions:

Expected Rate of Return

The expected rate of return is the anticipated percentage increase or decrease in an investment over a specified time period.

Capital Allocation Line

A graph showing all possible combinations of risky and risk-free assets for an investor, representing different levels of expected risk and return.

Expected Utility

A theory in economics that assesses how choices provide a certain level of satisfaction or utility to individuals, under conditions of uncertainty.

Expected Rate of Return

The profit or loss one anticipates on an investment that has various known or expected rates of return.