1. Toys World is currently an all equity firm that has 1,400,000 shares of stock outstanding with a market price of $54 a share. The current cost of equity is 10.28 percent and the tax rate is 34 percent. The firm is considering adding $5.8 million of debt with a coupon rate of 6.2 percent to its capital structure. The debt will be sold at par value. What is the levered value of the equity?
$77,643,200
$74,518,000
$71,772,000
$67,298,500
$65,530,000
2. Hi-Tek has debt with both a face and a market value of $6,200,000. This debt has a coupon rate of 6.4 percent and pays interest annually. The expected earnings before interest and taxes are $2,180,000, the tax rate is 34 percent, and the unlevered cost of capital is 8.54 percent. What is the firm's cost of equity?
7.86%
9.23%
11.20%
8.34%
10.02%