An Unlevered fiRm with a Market Value of $1 Million

question 357

Multiple Choice

An unlevered firm with a market value of $1 million has 50,000 shares outstanding. The firm restructures itself by issuing 200 new bonds with face value $1,000 and an 8% coupon. The firm
Uses the proceeds to repurchase outstanding stock. In considering the newly levered versus
Formerly unlevered firm, what is the break-even EBIT? Ignore taxes.

• A) $25,000
• B) $50,000
• C) $75,000
• D) $80,000
• E) $95,000

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Definitions:

Performance

The act of carrying out a task or function; how well an individual or group executes a given task.

Majority Influence

The effect that the larger group has on individuals causing them to conform or change their opinions to align with the group's.

Normative Pressure

The influence of societal norms and expectations on an individual's behavior.

Risky Shift

The phenomenon where groups tend to make riskier decisions compared to the decisions made by individuals.