Question
Michaely Electronics currently has no debt. Its operating income is $30 million and its tax rate is 40%. It pays out all of its net
Michaely Electronics currently has no debt. Its operating income is $30 million and its tax rate is 40%. It pays out all of its net income as dividends and has a zero growth rate. The current stock price is $60 per share, and it has 3.75 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)$43.66 B) $58.19 C)$48.00 D)$55.68
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