AK, Inc Is Considering Issuing Additional Long-Term Debt to Finance an an Expansion

question 30

Multiple Choice

AK, Inc. is considering issuing additional long-term debt to finance an expansion. The company currently has $20 million in 5% debt outstanding. Its earnings after-tax (EAT) are $3.0 million, and its marginal and average tax rate is 40 percent. The company is required by the debt holders to maintain its times interest earned ratio at 3.0 or greater. How much additional 10 percent debt can the company issue now and maintain its times interest earned ratio at 3.0? Assume for this calculation that earnings before interest and taxes remains at its present level.

• A) $10 million
• B) $ 6 million
• C) $ 1 million
• D) $5 million

Apply the concept of the internal rate of return (IRR) to assess investment viability.

Differentiate between relevant and irrelevant costs in investment analysis.

Evaluate projects using the simple rate of return method.

Understand the impact of depreciation, salvage value, and working capital on capital budgeting decisions.

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Definitions:

Annual Percentage

Often referred to in context of the annual percentage rate (APR), it represents the annual rate charged for borrowing or earned through an investment.

Return Requirement

The minimum rate of return an investor expects to achieve on an investment, influencing the types of assets included in their portfolio.

Cash Flows

The aggregate money movement into and out of an enterprise, significantly impacting its cash on hand.

Over-Valued

A term that describes securities or assets whose market price is considered too high relative to their intrinsic value or financial performance.