Gabella's Is an All-Equity Firm That Has 21,000 Shares of Stock

question 83

Multiple Choice

Gabella's is an all-equity firm that has 21,000 shares of stock outstanding at a market price of $40 a share.The firm has earnings before interest and taxes of $84,000 and has a 100 percent dividend payout ratio.Ignore taxes.Gabella's has decided to issue $160,000 of debt at a rate of 12 percent and use the proceeds to repurchase shares.Terry owns 400 shares of Gabella's stock and has decided to continue holding those shares.How will Gabella's debt issue affect Terry's annual dividend income?

• A)Decrease from $2,400 to $1,840
• B)Increase from $2,400 to $2,160
• C)Decrease from $1,600 to $1,525
• D)Increase from $1,600 to $2,094
• E)No change

---

Definitions:

Second-grader

A student typically in the second grade of elementary school, usually 7 or 8 years old.

Fluid Intelligence

The capacity to solve novel problems, think quickly, and use abstract reasoning, distinct from learned knowledge.

Analytic Intelligence

The ability to analyze, evaluate, judge, compare, and contrast; it is one of the three types of intelligence proposed by Sternberg's triarchic theory of intelligence.

Reason

The mental capacity for processing information, making judgments, and solving problems; often regarded as a fundamental aspect of human cognition.