Corporation a Decides to Borrow $1,000,000 and Use the Money

question 44

Multiple Choice

Corporation A decides to borrow $1,000,000 and use the money to buy back $1,000,000 of its common stock.The corporation pays 6% interest on its borrowed funds which exactly equals the amount of the dividend it used to pay on the common stock it repurchased.Therefore,

• A) Corporation A's operating income will decrease due to higher interest expense.
• B) Corporation A's net income will increase due to the tax deductibility of interest expense.
• C) Corporation A will have no change in its operating income since the interest expense exactly offsets the prior dividend payment.
• D) Corporation A's gross profit will decrease.

Apply break-even analysis to multi-product scenarios, including calculating sales mix and contribution margins.

Calculate and interpret operating income changes based on projected sales increases and operating leverage.

Understand the function and classification of support departments within an organization.

Comprehend the principles of applying overhead costs in product costing.

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Definitions:

Internal Rate

Often referring to the internal rate of return (IRR), which is the rate of growth a project is expected to generate, calculated as the rate of discount that makes the net present value (NPV) of all cash flows from a particular project equal to zero.

Net Present Value

A financial indicator that determines the variance between the current value of incoming and outgoing cash flows during a specific timeframe.

Initial Investment

The sum of funds utilized to initiate a project, investment, or business endeavor.

Cash Break-even

The point at which a business generates just enough revenue to cover its operating cash expenditures.