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:

Industrialization

The development of industries in a country or region on a wide scale, marked by the transition from agrarian societies to more complex industrial societies.

Labor Force

The total number of people who are eligible and able to work, including both the employed and those seeking employment.

Mid 19th Century

A period in the 1800s recognized for significant social, economic, and political changes, roughly from 1830 to 1870.

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