Gail's Dance Studio Is Currently an All Equity fiRm That

Multiple Choice

Gail's Dance Studio is currently an all equity firm that has 80,000 shares of stock outstanding with a market price of $42 a share. The current cost of equity is 12% and the tax rate is 34%. Gail is
Considering adding $1 million of debt with a coupon rate of 8% to her capital structure. The debt will
Be sold at par value. What is the levered value of the equity?

A) $2.4 million
B) $2.7 million
C) $3.3 million
D) $3.7 million
E) $3.9 million