Suppose You Work for the CFO of Danforth, Inc

question 120

Multiple Choice

Suppose you work for the CFO of Danforth, Inc. He believes sales and operating income will be sharply higher each year for the foreseeable future. If he seeks to maximize earnings per share, he
Should _____________. (Assume there are no taxes.)

• A) Increase the firm's debt to equity ratio.
• B) Increase the firm's debt to equity ratio if the firm's EBIT will remain below the break-even (comparing levered to unlevered) level of EBIT.
• C) Decrease the firm's debt to equity ratio.
• D) Not change the firm's debt to equity ratio.
• E) Decrease the firm's debt to equity ratio if the firm's EBIT will remain below the break-even (comparing levered to unlevered) level of EBIT.

---

Definitions:

Net Operating Income

The total profit of a company after operating expenses are subtracted from operating revenues, excluding non-operating income and expenses.

Contribution Margin Ratio

The percentage of each sales dollar that contributes toward covering fixed costs and generating profit.

Fixed Monthly Expenses

Recurring expenses that do not change in amount from month to month, such as rent, salaries, and insurance premiums.

Net Operating Income

Income from operations after deducting operating expenses but before interest and taxes.