Trueware Corporation Is a Start-Up Firm with a Capital Structure

question 9

Multiple Choice

Trueware Corporation is a start-up firm with a capital structure that includes 25 percent debt. Trueware has no preferred stock. The firm has two possible scenarios for its operations: Ruby or Emerald. The Ruby scenario has a 70 percent probability of occurring and the forecast earnings before interest and taxes (EBIT) in this scenario is $80,000. The Emerald scenario has a 30 percent chance of occurring and the EBIT is expected to be $32,000. Further, the firm's cost of debt is 10 percent. The firm has $500,000 in total assets and its marginal tax rate is 30 percent. The company has 22,000 shares of common stock outstanding. Calculate the difference in earnings per share (EPS) for the capital structure

• A)$1.53
• B)$1.20
• C)$1.48
• D)$2.24
• E)$3.15

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Definitions:

Unit Cost

The cost incurred to produce, manufacture, or acquire one unit of a product or service.

Economic Profits

Profits that exceed both the explicit and implicit costs of a business, including a normal return on investment.

Differentiate Products

The process of distinguishing a product or service from others in the market to make it more attractive to a particular target market.

Interindustry Competition

The competition for sales between the products of one industry and the products of another industry.