Donat Corp

question 63

Multiple Choice

Donat Corp.is a small company looking at two possible capital structures.Currently,the firm is an all-equity firm with $600,000 in assets and 100,000 shares outstanding.The market value of each share is $6.00.The CEO of Donat is thinking of leveraging the firm by selling $300,000 of debt financing and retiring 50,000 shares,leaving 50,000 shares outstanding.The cost of debt is 5% annually,and the current corporate tax rate for Donat is 30%.The CEO believes that Donat will earn $50,000 per year before interest and taxes.Which of the statements below is TRUE?

• A)All-equity EPS is $0.35.
• B)50/50 debt-to-equity EPS is $0.49.
• C)Shareholders will be better off by $0.14 per share under a firm with $300,000 in debt financing versus a firm that is all-equity.
• D)Statements A,B,and C are all true.

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Definitions:

Competency Perspective

This approach focuses on identifying and developing the essential skills, knowledge, abilities, and behaviors required for effective job performance in a particular role.

Leadership Performance

The effectiveness with which a leader directs and influences the behavior of others towards achieving specific objectives.

Path-Goal Theory

A leadership theory that suggests leaders can increase subordinate satisfaction and performance by clarifying the paths to goals and removing obstacles to performance.

Non-Routine Jobs

Jobs that require creativity, problem-solving, and decision-making, as they cannot be automated or easily predicted.