Hammel Corporation Is Comparing Two Different Capital Structures, an All-Equity

question 44

Multiple Choice

Hammel Corporation is comparing two different capital structures, an all-equity plan and alevered plan. Under the all-equity plan, Hammel would have 80,000 shares of stock outstanding.Under the levered plan, there would be 50,000 shares outstanding and $300,000 in debtoutstanding. A share of stock is valued to be $10 regardless of the plan. The interest rate on the debt is 8%. Ignoring taxes, at EBIT equal to $100,000, shareholders of Hammel Corporation would

• A) prefer the levered plan.
• B) be indifferent to which plan is selected.
• C) prefer the all-equity plan.
• D) which plan is better cannot be determined with the information provided

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Definitions:

Candy Company

A business enterprise that specializes in the production and sale of sweets and chocolates.

Probability

A measure of the likelihood that a particular event will occur, expressed as a number between 0 and 1, where 0 indicates impossibility and 1 indicates certainty.

Contact Lenses

Optical devices worn directly on the cornea of the eye to correct vision or for cosmetic purposes.

Students

Individuals who are enrolled in an educational institution for the purpose of learning and acquiring knowledge and skills.