Copybold Corporation Copybold Corporation Is a Start-Up Firm Considering Two Alternative Capital

question 15

Multiple Choice

Copybold Corporation
Copybold Corporation is a start-up firm considering two alternative capital structures⎯one is conservative and the other aggressive. The conservative capital structure calls for a D/A ratio = 0.25, while the aggressive strategy call for D/A = 0.75. Once the firm selects its target capital structure it envisions two possible scenarios for its operations: Feast or Famine. The Feast scenario has a 60 percent probability of occurring and forecast EBIT in this state is $60,000. The Famine state has a 40 percent chance of occurring and the EBIT is expected to be $20,000. Further, if the firm selects the conservative capital structure its cost of debt will be 10 percent, while with the aggressive capital structure its debt cost will be 12 percent. The firm will have $400,000 in total assets, it will face a 40 percent marginal tax rate, and the book value of equity per share under either scenario is $10.00 per share

-Refer to Copybold Corporation.What is the coefficient of variation of expected EPS under the aggressive capital structure plan?

• A) 1.00
• B) 1.18
• C) 2.45
• D) 2.88
• E) 3.76

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Definitions:

Axillary

Pertaining to the armpit area, often referring to the location of lymph nodes or the measurement of body temperature.

Oral

Pertaining to the mouth, including the administration of medicine or other substances through the mouth.

Rectal

Pertaining to, situated at, or involving the rectum, which is the final section of the large intestine.

Celsius

A scale for measuring temperature in which water freezes at 0 degrees and boils at 100 degrees under standard conditions.