Firewall Corp

question 33

Multiple Choice

Firewall Corp.is a small company looking at two possible capital structures.Currently,the firm is an all-equity firm with $900,000 in assets and 100,000 shares outstanding.The market value of each share is $9.00.The CEO of Firewall is thinking of leveraging the firm by selling $270,000 of debt financing and retiring 30,000 shares,leaving 70,000 shares outstanding.The cost of debt is 6% annually,and the current corporate tax rate for Firewall is 30%.The CEO believes that Firewall will earn $100,000 per year before interest and taxes.Which of the statements below is TRUE?

• A)All-equity EPS is $0.70.
• B)30/70 debt-to-equity EPS is $0.838.
• C)Shareholders will be better off by almost $0.14 per share under a firm with $270,000 in debt financing versus a firm that is all-equity.
• D)Statements A,B,and C are all true.