A Firm Has a Current Capital Structure Consisting of $400,000

question 1

Multiple Choice

A firm has a current capital structure consisting of $400,000 of 12 percent annual interest debt and50,000 shares of common stock. The firm's tax rate is 40 percent on ordinary income. If the EBIT isexpected to be $200,000, two EBIT-EPS coordinates for the firm's existing capital structure are

• A) ($0, $48,000) and ($200,000, $1.82)
• B) ($152,000, $3.50) and ($150,000, $1.82)
• C) ($36,000, $0) and ($200,000, $3.04)
• D) ($48,000, $0) and ($200,000, $1.82)

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Definitions:

Marginal Cost

Marginal cost is the cost incurred by producing one additional unit of a product or service, emphasizing the concept of variable costing.

Resource Allocation

The process of allocating resources, including capital, labor, and materials, among competing uses or projects in an efficient manner.

Production Possibilities Curve

The Production Possibilities Curve (PPC) is a model that shows the various combinations of two goods or services that an economy can produce, given its resources and technology, illustrating the concept of opportunity cost.

Unemployment Rate

The percentage of the labor force unemployed at any time.