A Firm Is Currently Expected to Develop $2 EPS When

question 116

Multiple Choice

A firm is currently expected to develop $2 EPS when operating income equals $4 million and interest expense equals $2 million.How low can operating income drop before EPS is reduced by half, to $1? Ignore taxes.

• A)operating income drops to $3.5 million.
• B)operating income drops to $3.0 million.
• C)operating income drops to $2.5 million.
• D)operating income drops to $2.0 million.

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Definitions:

Coupon Bonds

Bonds that pay the holder a fixed interest rate (the coupon) over a specified period, typically until maturity when the principal, or face value, is repaid.

Market Yield

The rate of return anticipated on a bond if it is held until the maturity date, factoring in its current price, interest payments, and term length.

Treasury Bills

Short-term government securities issued at a discount from face value and mature at par.

Market Risk Premium

The extra return expected by investors for holding a risky market portfolio instead of risk-free assets.