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Axis Manufacturing Company, Inc. (AXCI), a very small company in terms of market capitalization,…

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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 AXCI’s 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 AXCI’s 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

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