Dabney Electronics Currently Has No Debt

question 51

Multiple Choice

Dabney Electronics currently has no debt. Its operating income is $20 million and its tax rate is 40%. 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% debt and 60% equity (based on market values) , its investment bankers believe its weighted average cost of capital would be 10%. What would its stock price be if it changes to the new capital structure?

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

---

Definitions:

Present Value

The value today of a sum of money or cash flows expected in the future, discounted at a certain rate of return.

Maturity Value

The amount that will be paid out or received, including principal and interest, upon the expiration or maturity of a financial instrument.

Notes Receivable-Lewisburg Fabricators

A specific financial claim or loan that Lewisburg Fabricators holds against a debtor, documented through a promissory note indicating the amount owed and payment terms.

Balance

In accounting, balance refers to the difference between the sum of debits and credits in an account, often shown on financial statements like the balance sheet.