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Hanover Tech is currently an all-equity company that has 145,000 shares of stock outstanding with a market price of $22 a share. The current cost of equity is 13.9 percent and the tax rate is 21 percent. The company is considering adding $1.5 million of debt with a coupon rate of 7.5 percent to its capital structure. The debt will be sold at par value. What is the levered value of the equity?

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Answer:

$2,005,000

Explanation:

In the given question, first we will calculate the geared value of the Hanover Tech which shall be determined as follows:

Geared value of the Hanover Tech= ungeared value of the Hanover Tech+Debt of the company*Tax rate

Geared value of the Hanover Tech=145,000*$22+$1,500,000*21%

                                                          =$3,505,000

Now we will calculate the levered value of the equity, which shall be determined as follows:

Levered value of the equity of Hanover Tech= Geared value of the Hanover Tech- value of the Debt

Levered value of the equity of Hanover Tech=$3,505,000-$1,500,000

                                                                           =$2,005,000

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