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Dabney Electronics currently has no debt. Its operating income(EBIT) is $30 million and its tax rate is 40 percent. It pays outall of its net income as dividends and has a zero growth rate. Ithas 2.5 million shares of stock outstanding. If it moves to acapital structure that has 40 percent debt and 60 percent equity(based on market values), its investment bankers believe itsweighted average cost of capital would be 10 percent. What wouldits stock price be immediately after issuing debt if it changes tothe new capital structure?

Hint: Find value of the firm after capitalization using Va =FCF1/(WACC-g), and then calculate price of the stock using P0 = [S+ (D – D0) ] / n0)

a.

$90
b.

$60
c.

$48
d.

$200
e.

$72

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Casey Durgan
Casey DurganLv2
28 Sep 2019

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