Copybold Corporation Is a Start-Up Company That Has a Capital

question 18

Multiple Choice

Copybold Corporation is a start-up company that has a capital structure with a debt/assets ratio equal to 0.75. Copybold has no preferred stock. There are two possible scenarios with respect to the firm's operations: Feast or Famine. The Feast scenario has a 60 percent probability of occurring, and the forecast earnings before interest and taxes (EBIT) in this scenario is $60,000. The Famine scenario has a 40 percent chance of occurring, and the EBIT is expected to be $20,000. Further, the firm's cost of debt is 12 percent. The firm has $400,000 in total assets, and its marginal tax rate is 40 percent. The company has 10,000 shares of stock outstanding. What is the difference between the earnings per share (EPS) forecasts for the Feast scenario and the Famine scenario?

• A)$1.44 per share
• B)$2.40 per share
• C)$1.48 per share
• D)$0.48 per share
• E)$0.96 per share

---

Definitions:

Real Wages

The buying capacity of earnings, when accounted for inflation, showing the amount of goods and services that can be purchased.

CPI

The Consumer Price Index is an indicator that calculates the overall average prices of a selection of consumer items and services, including food, transportation, and healthcare, which is utilized to measure inflation.

Winner-Take-All Markets

Markets in which the top performers are able to capture a very large share of the rewards, and the rest are left with very little.

Substitution Effect

The economic understanding that as prices rise or incomes decrease, consumers will replace more expensive items with less costly alternatives.