Powell Plastics, Inc

question 65

Multiple Choice

Powell Plastics, Inc. (PP) currently has zero debt. Its earnings before interest and taxes (EBIT) are $80,000, and it is a zero growth company. PP's current cost of equity is 10%, and its tax rate is 40%. The firm has 10,000 shares of common stock outstanding selling at a price per share of $48.00.
-PP is considering moving to a capital structure that is comprised of 30% debt and 70% equity, based on market values. The debt would have an interest rate of 8%. The new funds would be used to repurchase stock. It is estimated that the increase in risk resulting from the added leverage would cause the required rate of return on equity to rise to 12%. If this plan were carried out, what would be PP's new value of operations?

• A) $484,359
• B) $487,805
• C) $521,173
• D) $560,748
• E) $584,653

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Definitions:

Null Hypothesis

A type of hypothesis used in statistics that proposes that no statistical significance exists in a set of given observations.

Research Hypothesis

A specific, testable prediction about the expected outcome of a study.

Representative Sample

A segment of the population that precisely mirrors the characteristics of the whole population.

Population

The entire group of individuals or instances about whom the research is focused.