CFO of Shalit Industries Plans to Have the Company Issue

question 26

Multiple Choice

CFO of Shalit Industries plans to have the company issue $300 million of new common stock and use the proceeds to pay off some of its outstanding bonds.Assume that the company, which does not pay any dividends, takes this action, and that total assets, operating income (EBIT) , and its tax rate all remain constant.Which of the following would occur?

• A)The company's taxable income would fall.
• B)The company's interest expense would remain constant.
• C)The company would have less common equity than before.
• D)The company's net income would increase.
• E)The company would have to pay less taxes.

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Definitions:

Relevant Range

The span of activity level or volume in which the specific assumptions of cost behavior are considered to be applicable.

Break-Even Point in Units

The point at which sales volumes result in no profit or loss, calculated by dividing fixed costs by the contribution margin per unit.

Unit Fixed Cost

The fixed cost associated with manufacturing one unit of a product, which remains constant regardless of the number of units produced.

Unit Variable Cost

The variable cost associated with producing one unit of product, including materials, labor, and other costs that vary with production volume.