Question :
Multiple Choice Questions
31. A firm expected to generate $1.5 million in : 1284358
Multiple Choice Questions
31. A firm is expected to generate $1.5 million in operating income and pay $250,000 in interest. Ignoring taxes, this will generate $12.50 earnings per share. What will happen to EPS if operating income increases to $2.0 million?
A. EPS increase to $15.63.
B. EPS increase to $16.67.
C. EPS increase to $17.50.
D. EPS increase to $20.00.
32. A firm issues 100,000 equity shares with a total market value of $5,000,000. The firm’s market value of debt is also of equal amount (i.e., $5,000,000). The firm is expected to generate $1.5 million in operating income and pay $250,000 in interest. Ignoring taxes, this will generate $12.50 earnings per share. What will happen to EPS if the firm’s borrowing and interest expense increases by 50% and the number of shares in circulation is cut by 50% (assuming that the share price remains unchanged with this change in capital structure)?
A. EPS decrease to $10.00.
B. EPS decrease to $11.67.
C. EPS increase to $15.00.
D. EPS increase to $22.50.
33. A firm issues 100,000 equity shares with a total market value of $5,000,000. The firm’s market value of debt is also of equal amount (i.e., $5,000,000). The firm is expected to generate $1.5 million in operating income and pay $250,000 in interest. Ignoring taxes, this will generate $12.50 earnings per share. What will happen to EPS if the firm’s borrowing and interest expense increases by 75% and the number of shares in circulation is cut by 75% (assuming that the share price remains unchanged with this change in capital structure)?
A. EPS decrease to $10.00.
B. EPS stay at $12.50.
C. EPS increase to $30.00.
D. EPS increase to $42.50.
34. What is meant by investors being able “to undo” the effects of corporate restructuring? Investors:
A. repay their portion of the firm’s debt.
B. purchase securities only in unlevered firms.
C. will pay more for unlevered shares.
D. borrow in their name and replicate the effects of restructuring.
35. Under the assumptions necessary for MM I, if investors can borrow or lend at the same terms as the firm, they will:
A. invest in debt only and ignore equity investments.
B. not be willing to pay more for a restructured firm.
C. require a higher rate of return on equity.
D. accept a lower rate of return on equity.
36. The stability of a firm’s operating income is the focus of:
A. financial leverage.
B. weighted-average cost of capital.
C. capital structure.
D. business risk.
37. An increase in a firm’s financial leverage will:
A. increase the variability in earnings per share.
B. always reduce the operating risk of the firm.
C. increase the value of the firm in a non-MM world.
D. increase the WACC.
38. Financial risk refers to the:
A. risk of owning equity securities.
B. risk faced by equityholders when debt is used.
C. general business risk of the firm.
D. possibility that interest rates will increase.
39. What is the proportion of debt financing for a firm that expects a 24% return on equity, a 16% return on assets, and a 12% return on debt? Ignore taxes.
A. 54.0%
B. 60.0%
C. 66.7%
D. 75.0%
40. What is the expected return on equity for a firm with a 14% expected return on assets that pays 9% on its debt, which totals 30% of assets?
A. 16.14%
B. 17.00%
C. 19.00%
D. 25.67%
