Sewer's Paradise Is an All Equity Firm That Has 5,000

question 75

Multiple Choice

Sewer's Paradise is an all equity firm that has 5,000 shares of stock outstanding at a market price of $15 a share.The firm's management has decided to issue $30,000 worth of debt and use the funds to repurchase shares of the outstanding stock.The interest rate on the debt will be 10 percent.What are the earnings per share at the break-even level of earnings before interest and taxes? Ignore taxes.

• A)$1.46
• B)$1.50
• C)$1.67
• D)$1.88
• E)$1.94

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Definitions:

Sherman Act

A landmark federal statute in the antitrust law of the United States, passed in 1890, which prohibits certain business activities that federal government regulators deem to be anti-competitive.

Alcoa Case

A 1945 case in which the courts ruled that the possession of monopoly power, no matter how reasonably that power had been used, was a violation of the antitrust laws; temporarily overturned the rule of reason applied in the U.S. Steel case.

Monopoly Structure

A market form where a single firm controls the entire market for a product or service, with no close substitutes.