Dabney Electronics currently has no debt. Its operating income (EBIT) is $20 million and its tax rate is 40 percent. 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 percent debt and 60 percent equity (based on market values), its investment bankers believe the cost of equity will increase to 12.67 percent and that the pre-tax cost of debt will be 10 percent.

1. What would be the WACC of the firm if the capital structure change were made?

1. 10%
2. 11%
3. 12%
4. 13%
5. 14%

2. What would be the value of the firm if the capital structure change were made?

1. 120 million
2. 130 million
3. 140 million
4. 150 million
5. 160 million

3. What would its stock price be if it changes to the new capital structure?

1. 40
2. 48
3. 52
4. 54
5. 60