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:

Gini Ratio

A measure of the income distribution within a population, indicating inequality where 0 represents perfect equality and 1 represents perfect inequality.

Income Inequality

The uneven distribution of income within a population, leading to disparities in wealth and living standards.

Taxes And Transfers

Taxes and transfers involve government activities related to collecting revenues through various forms of taxation and redistributing income through welfare programs and other transfers to support social objectives.