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:

Linear Regression

A statistical method for modeling the relationship between a dependent variable and one or more independent variables by fitting a linear equation to observed data.

Correlation Matrix

A table showing correlation coefficients between variables, indicating the strength and direction of relationships.

Regression Model

A statistical model that estimates the relationship between a dependent variable and one or more independent variables.

Regression Coefficients

Numeric values that represent the degree of change in the dependent variable expected for a one-unit change in one of the independent variables, holding other factors constant.