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

Comprehend the concepts of paid-in capital, retained earnings, and stockholders' equity.

Acknowledge the public availability of corporate documents such as the charter and articles of incorporation.

Recognize the advantages and disadvantages of a corporation, including taxation and liability issues.

Distinguish between common and preferred stock, including their rights and types.

---

Definitions:

Mosquito Spray

A substance applied to skin, clothing, or other surfaces to deter mosquitoes and prevent mosquito bites.

Common Law

a body of law derived from judicial decisions of courts and similar tribunals, as opposed to statutes or constitutions.

Nuisance

An act, condition, or thing that is annoying, harmful, or inconvenient to a community or individual.

Trespass

An unlawful intrusion or invasion of a person's property or rights, which can involve land, personal property, or personal rights.