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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 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

12.Which of the following statements is TRUE regarding free cash flow the firm (FCFF)?

A. FCFF is the cash flow available to the companys suppliers of capital after all operating expenses (including taxes) have been paid and necessary investments in fixed capital have been made.

B. FCFF is cash flow available to the companys suppliers of capital after all operating expenses (including taxes) have been paid and necessary investments in working capital and fixed capital have been made.

C. FCFF is the cash from operations minus capital expenditures.

D. A and B

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