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

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

Correct Answer:

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