Merriwether Building Has Operating Income of $20 Million,a Tax Rate

question 29

Multiple Choice

Merriwether Building has operating income of $20 million,a tax rate of 40%,and no debt.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

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Definitions:

Spline

A series of ridges or teeth on a drive shaft that mesh with grooves in a mating piece, allowing torque to be transferred while permitting some axial movement.

Yoke

Any of a number of different fork-shaped components. Shift yokes (on shift rails) fit to dog clutches in a transmission to move them in and out of engagement. A pair of drive shaft yokes couple to each other using a U-joint as an intermediary.

Brinelling

Minor indentations on the shoulder or in the valley of a bearing race, usually caused by improper installation.

Spalling

Surface fatigue that occurs when chips, scales, or flakes of surface metal separate because of fatigue rather than wear.