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

question 11

Multiple Choice

Merriwether Building has operating income of $20 million, a tax rate of 25%, and no debt.It pays out all of its net income as dividends and has a zero growth rate.The current stock price is $27 per share, and it has 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) $28
• B) $30
• C) $33
• D) $35
• E) $40

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Definitions:

Discretionary Policy

Refers to economic strategies and actions, such as changes in tax rates or government spending, opted by the government to manage the economy.

Passive Approach

An investment strategy that involves minimal buying and selling actions, typically focused on long-term investment in index funds and other diversified holdings.

Expansionary Monetary Policy

A policy by central banks to increase the money supply and decrease interest rates to stimulate economic growth.

Real Output

The measure of goods and services produced by an economy, adjusted for inflation or deflation, showing true growth or contraction.