Question

Toys World is currently an all equity firm that has 1,400,000 shares of stock outstanding with a market price of $54 a share. The current cost of equity is 10.28 percent and the tax rate is 34 percent. The firm is considering adding $5.8 million of debt with a coupon rate of 6.2 percent to its capital structure. The debt will be sold at par value. What is the levered value of the equity? $77,643,200

$74,518,000

$71,772,000

$67,298,500

$65,530,000

Answer 1

Option c "$71,772,000" is correct
Shares Outstanding	1,400,000
Market price per share(P0)	54
Cost of equity(Ke)	10.28%
Tax rate	34%
Additional debt	5,800,000
Cost of debt before tax	6.2%
Value of levered firm(VL)=(shares outstanding*market price)+(tax rate*Market value of debt)
Value of Equity(VE)=Value of levered firm-market value of debt
Value of levered firm=(1400000*54)+(34%*5800000)			77,572,000
Value of Equity=77572000-5800000			71,772,000