Holly's Is Currently an All Equity Firm That Has 9,000

question 28

Multiple Choice

Holly's is currently an all equity firm that has 9,000 shares of stock outstanding at a market price of $45 a share.The firm has decided to leverage its operations by issuing $120,000 of debt at an interest rate of 9.5 percent.This new debt will be used to repurchase shares of the outstanding stock.The restructuring is expected to increase the earnings per share.What is the minimum level of earnings before interest and taxes that the firm is expecting? Ignore taxes.

• A)$38,475
• B)$40,516
• C)$42,000
• D)$44,141
• E)$45,020

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Definitions:

Principal Market

The market with the greatest volume and level of activity for the asset.

Active Market

A market in which transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis.

Non-performance Risk

Non-performance risk is the risk that a counterparty will not fulfil their contractual obligations, affecting the valuation of financial instruments.

Credit Risk

The possibility that a lender may not receive the owed principal and interest, leading to a loss.