Question

1. An all-equity firm currently has 1,500,000 shares of stock outstanding and is considering borrowing $5,000,000 at an annual rate of 7% and buying back one-half of those shares. What amount of annual interest would the firm pay on this borrowing?

B. answer

$350,000

2. An all-equity firm currently has 3,000,000 shares of stock outstanding and is considering borrowing $8,000,000 at 6%

B. answer is

$960,000

and buying back one-half of those shares. What is the break-even EBIT assuming a tax rate of zero?

3. For the firm in #2 what is its EPS (a) before; and (b) after borrowing the $8,000,000 if its tax rate is zero and its EBIT is $1,000,000?

A.

$0.35 $0.33

B.

$0.24; $0.24

C.

$0.35; $0.48

D.

$0.33; $0.35

4. For the firm in #2 what is its EPS (a) before; and (b) after borrowing the $8,000,000 if its tax rate is zero and its EBIT is $600,000?

A.

$0.60; $0.80

B.

$0.80; $0.60

C.

$0.20; $0.08

D.

$0.08 $0.20

5 If the company described in questions 1 - 4 expects its annual EBIT to be a constant $1,000,000 for the foreseeable future, should it undertake the capital restructuring?

A.

No, because the EBIT is below the break-even EBIT.

B.

No, because the EPS is above the EBIT.

C.

Yes, because the EPS is equal to the EBIT.

D.

Yes, because the EBIT is above the break-even EBIT.

6. If the company in questions 1 - 4 expects its annual EBIT to be a constant $700,000, for the foreseeable future, should it undertake the capital restructuring?

A.

Yes, because the EPS is equal to the break-even EBIT.

B.

Yes, because the EBIT is above the break-even EBIT.

C.

No, because the EBIT is below the break-even EBIT.

D.

No, because the EPS is above the break-even EBIT.

just answer number 3,4,5,6

Answer 1