Dabney Electronics Currently Has No Debt

question 14

Multiple Choice

Dabney Electronics currently has no debt. Its operating income is $20 million and its tax rate is 40 percent. It pays out all of its net income as dividends and has a zero growth rate. The current stock price is $40 per share, and it has 2.5 million shares of stock outstanding. If it moves to a capital structure that has 40 percent debt and 60 percent equity (based on market values) , its investment bankers believe its weighted average cost of capital would be 10 percent. What would its stock price be if it changes to the new capital structure?

• A) $40
• B) $48
• C) $52
• D) $54
• E) $60

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Definitions:

Settlement

The agreement reached between two parties to resolve a dispute or lawsuit outside of court.

Safe Workplace

A work environment that is free from dangers and hazards, ensuring the health and safety of employees.

Implied Employment

A work relationship based on actions, conduct, or circumstances, rather than a written contract, suggesting an employer-employee relationship.

Wrongful Dismissal

The termination of an employee's contract of employment in violation of the law or the contract terms.