Question: Dabney Electronics currently has no debt. Its operating income (EBIT) is $30 million and its tax rate is 40 percent. It pays out all of

Dabney Electronics currently has no debt. Its operating income (EBIT) is $30 million and its tax rate is 40 percent. It pays out all of its net income as dividends and has a zero growth rate. It has 2.5 million shares of stock outstanding. If it moves to a capital structure that has 40 percent debt and 60 percent equity (based on market values), its investment bankers believe its weighted average cost of capital would be 8 percent. What would its stock price be immediately after issuing debt if it changes to the 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.

$200
c.

$60
d.

$72
e.

$48

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