Alexandria's Dance Studio Is Currently an All-Equity Firm with Earnings

question 34

Multiple Choice

Alexandria's Dance Studio is currently an all-equity firm with earnings before interest and taxes of $338,000 and a cost of equity of 14.2 percent.Assume the tax rate is 22 percent.The firm is considering adding $400,000 of debt with a coupon rate of 7 percent to its capital structure.The debt will be sold at par value.What is the levered value of the equity?

• A)$1,987,408
• B)$1,544,620
• C)$2,038,519
• D)$986,420
• E)$1,944,620

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Definitions:

Accounting System

A systematic process of recording, reporting, and analyzing financial transactions of a business.

Data from Source Documents

Information collected from original records or documents used for analysis or decision-making.

Raw Data

Unprocessed and unanalyzed information collected from observations, measurements, or responses, often the initial step before analysis or interpretation.

Conversion

The act of changing something into a different form or entity, often used in marketing to refer to turning prospects into customers.