Hanover Tech is currently an all equity firm that has 320,000 shares of stock ou

Question

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 36 percent. The firm is considering permanently 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? HINT: First get the value of the unlevered firm. Then calculate the value of the levered firm. The value of any firm is the value of the debt plus the value of the equity. $5.209 million $5.312 million: I know this is the right answer, but I don't know how to get to it $5.436 million $6.512 million $6.708 million Show Work

Explanation / Answer

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 36 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. $5.312 million

C. $5.436 million

D. $6.512 million

E. $6.708 million

VL = (320,000 $19) + (0.36 $1.2m) =$6.512m

VE = $6.512m - $1.2m = $5.312m

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