Trueware Corporation Is a Start-Up Firm That Has a Capital

question 22

Multiple Choice

Trueware Corporation is a start-up firm that has a capital structure that calls for a debt/assets ratio of 0.25. The firm has two possible scenarios for its operations: Ruby or Emerald. The Ruby scenario has a 70 percent probability of occurring and forecast earnings before interest and taxes (EBIT) in this state is $80,000. The Emerald state has a 30 percent chance of occurring and the EBIT is expected to be $32,000. Further, the cost of debt for this capital structure will be 10 percent. The firm will have $500,000 in total assets and it will face a marginal tax rate of 30 percent. The company has 22,000 outstanding shares. Calculate the difference in EPS for the capital structure.

• A) $1.0
• B) $1.20
• C) $1.48
• D) $2.24
• E) $3.15

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Definitions:

Independent Variables

Factors in an experiment that are purposely manipulated to observe their effect on dependent variables.

Durbin-Watson Statistic

A measure used in statistics to detect the presence of autocorrelation in the residuals from a regression analysis.

First-Order Autocorrelation

First-order autocorrelation is a statistical measure indicating the correlation between values in a time series and their immediate predecessors.

Durbin-Watson D Statistic

A statistical tool designed to determine the existence of first-lag autocorrelation in the residuals of a regression analysis.