Merriwether Building Has Operating Income of $20 Million, a Tax

Merriwether Building has operating income of $20 million, a tax rate of 25%, and no debt.It pays out all of its net income as dividends and has a zero growth rate.The current stock price is $27 per share, and it has 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) $28
B) $30
C) $33
D) $35
E) $40

Correct Answer:

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