Recent Question

If you know that your firm is facing relatively poor prospects but needs new capital . If you know that your firm is facing relatively poor prospects but needs new capital, and you know that investors do not have this information, signaling theory would predict that you would a. Issue debt to maintain the returns of equity holders. b. Issue equity to share the burden of decreased equity returns between old and new shareholders. c. Be i ...

Other / Other 26 May 2016

What is the coefficient of variation of expected EPS under the conservative capital structure . Pennington Airlines currently has a beta of 1.2. The company’s capital structure consists of $7 million of equity and $3 million of debt. The company is considering changing its capital structure. Under the proposed plan the company would increase its debt by $2 million and use the proceeds to repurchase common stock. (So, after the ...

Other / Other 26 May 2016

The use of financial leverage by the firm has a potential impact on which of the following . Which of the following statements is most correct? a. An increase in fixed costs, (holding sales and variable costs constant) will reduce the company’s degree of operating leverage. b. An increase in interest expense will reduce the company’s degree of financial leverage. c. If the company has no debt outstanding, then its degr ...

Other / Other 26 May 2016

Which of the following will occur as a result of the recapitalization . Which of the following statements is most correct? a. When a company increases its debt ratio, the costs of both equity and debt capital increase. Therefore, the weighted average cost of capital (WACC) must also increase. b. The capital structure that maximizes stock price is generally the capital structure that also maximizes earnings per share. c. Since debt ...

Other / Other 26 May 2016

What will be the firm's expected EBIT in one year . PQR Manufacturing Corporation has $1,500,000 in debt outstanding. The company's before-tax cost of debt is 10 percent. Sales for the year totaled $3,500,000 and variable costs were 60 percent of sales. Net income was equal to $600,000 and the company's tax rate was 40 percent. If PQR's degree of total leverage is equal to 1.40, what is its degree of operating leverage? a. 1.15 b. 1.0 ...

Other / Other 26 May 2016

Which of the following are practical difficulties associated with capital structure and degree of leverage analyses . Firm U and Firm L each have the same total assets. Both firms also have a basic earning power of 20 percent. Firm U is 100 percent equity financed, while Firm L is financed with 50 percent debt and 50 percent equity. Firm L’s debt has a before-tax cost of 8 percent. Both firms have positive net income. Which o ...

Other / Other 26 May 2016

Which of the following factors would affect a company’s business risk ? . A decrease in the debt ratio will generally have no effect on . a. Financial risk. b. Total risk. c. Business risk. d. Market risk. e. None of the above is correct. (It will affect each type of risk above.) . Business risk is concerned with the operations of the firm. Which of the following is not associated with (or not a part ...

Other / Other 26 May 2016

What is the expected price of the company’s stock following the recapitalization . Hensley Corporation uses breakeven analysis to study the effects of expansion projects it considers. Currently, the firm’s plastic bag business segment has fixed costs of $120,000, while its unit price per carton is $1.20 and its variable unit cost is $0.60. The firm is considering a new bag machine and an automatic carton folder as modific ...

Other / Other 26 May 2016

What would be the company’s stock price following the repurchase transaction . Flood Motors is an all-equity firm with 200,000 shares outstanding. The company’s EBIT is $2,000,000, and EBIT is expected to remain constant over time. The company pays out all of its earnings each year, so its earnings per share equals its dividends per share. The company’s tax rate is 40 percent. The company is considering issuing ...

Other / Other 26 May 2016

Which of the following is a fundamental quality of useful accounting information 1. The objective of financial reporting in the International Accounting Standards Board’s (IASB’s) Conceptual Framework a. Is the foundation for the Framework. b. Includes the qualitative characteristics that make accounting information useful. c. Is found on the third level of the Framework. d. All of the choices are correct regarding the ...

Other / Other 26 May 2016