Knight Moves Is Considering Two Alternative Financing Plans

question 51

Multiple Choice

Knight Moves is considering two alternative financing plans.The firm is expected to operate at the $75 million EBlT level.Under Plan D (debt financing) EPS is expected to be $2.25, and under Plan E (equity financing) EPS is expected to be $1.82.If the market is expected to assign a PIE ratio of 12 to the debt plan and 15 to the equity plan, which plan should Knight pursue?

• A)debt
• B)equity
• C)indifferent between the two alternatives
• D)neither is satisfactory

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Definitions:

Accounts Receivable

Money owed to a business by its customers for goods or services that have been delivered or used but not yet paid for.

Net Income

The residual income of a company once every expense and tax payment has been extracted from revenue.

Amortization Expense

The portion of the cost of an intangible asset that is allocated as an expense over its useful life.

Accrued Expenses

Expenses that have been incurred but not yet paid or recorded through the normal accounting process.