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 $1.25 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) $2.5 million
B) $2.7 million
C) $3.3 million
D) $3.7 million
E) $3.9 million