Question

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. The value of the unleveraged firm is __________, and the value of the levered firm is __________________.

NOTE: Value of leveraged Firm = Value of leveraged equity + Value of Debt

Group of answer choices

$2,764,900; $3,514,900

$2,502,400; $2,502,400

$2,502,400; $3,514,900

$2,764,900; $2,502,400

Answer 1

Value of unlevered firm = 68000 shares x 36.80 = 2,502,400

Value of levered firm =  Value of unlevered firm + Debt*tax rate

Value of levered firm = 2502400 + 750000 x 35% = 2,764,900

Answer : Last option : 2,764,900 and 2,502,400

Note : fill in the blank has first blank of unlevered firm and second is of levered firm , but answers are written reverse. The first answer shows levered value and second answer shows unlevered value.

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