What does two percent annual inflation rate mean

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Reference no: EM131918479

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

Reference no: EM131918479

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