Axis Manufacturing Company, Inc. (AXCI), a very small company in terms of market capitalization, has total assets of 3,000,000 financed by 40% with debt capital. The cost of debt is 7.5% before taxes and cost of equity is 12.5%. The company has earnings before interest and taxes (EBIT) of 300,000 and a tax rate of 30%. Assume that that initially AXCI equity is selling for a book value or 3,000,000 with 150,000 shares outstanding.

10. Because AXCIs residual income is negative, therefore its stock price must fall from 12 per share to ______ per share.

a. 7.90 b. 7.84

c 7.00 d. 7.20

e. 8.34

11. The charges for equity capital and debt capital for AXCIs residual are respectively equal to _______.

a. 225,000 and 288,000 b. 288,000 and 225,000

c 180,000 and 243,000

d. 180,000 and 225,000

e. 100,000 and 100,000