1. What does a 2 percent annual inflation rate mean?
a. There is 2 percent more money in circulation than the year before.
b. Wages increase by 2 percent each year.
c. On average, a dollar buys 2 percent fewer goods and services than it did the year before.
d. On average, a dollar buys 2 percent more goods and services than it did the year before.
2. The Anderson Company Ltd. (ACL) currently has $200,000 market value (and book value) of perpetual debt outstanding carrying a coupon rate of 6%. Its earnings before interest and taxes (EBIT) are $100,000, and it is a zero growth company. ACL's current cost of equity is 8.8%, and its tax rate is 40%. The firm has 10,000 shares of common stock outstanding selling at a price per share of $60.00.
Now, assume that ACL is considering changing from its original capital structure to a new capital structure with 50% debt and 50% equity. If it makes this change, its resulting cost of equity would be 9.25%. What would be its new stock price per share?
A. $83.44
B. $78.25
C. $57.34
D. $73.39
E. $69.86