An Unlevered Firm with a Market Value of $1 Million

question 246

Multiple Choice

An unlevered firm with a market value of $1 million has 50,000 shares outstanding. The firm restructures itself by issuing 200 new bonds with face value $1,000 and an 8% coupon. The firm uses the proceeds to repurchase outstanding stock. In considering the newly levered versus formerly unlevered firm, what is the break-even EBIT? Ignore taxes.

• A) $25,000
• B) $50,000
• C) $75,000
• D) $80,000
• E) $95,000

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Definitions:

Raw Materials

Basic materials used in the production process to create goods and services.

T-account

A visual representation of a general ledger account, showing debit and credit transactions and the resulting balance.

Raw Materials

The basic substances used in the production of goods, often processed in several steps before becoming part of the final product.

Advertising Costs

The expenses incurred in promoting a product, service, or business, typically through various media channels.