A Firm Issues 100,000 Equity Shares with a Total Market

question 9

Multiple Choice

A firm issues 100,000 equity shares with a total market value of $5,000,000. The firm's market value of debt is also of equal amount . The firm is expected to generate $1.5 million in operating income and pay $250,000 in interest. Ignoring taxes, this will generate $12.50 earnings per share. What will happen to EPS if the firm's borrowing and interest expense increases by 50% and the number of shares in circulation is cut by 50% (assuming that the share price remains unchanged with this change in capital structure) ?

• A) EPS decreases to $10.00.
• B) EPS decreases to $11.67.
• C) EPS increases to $15.00.
• D)EPS increases to $22.50.

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Definitions:

Negative Reinforcement

The process of strengthening a behavior by removing or avoiding a negative outcome or stimulus.

Positive Punishment

A method of behavior modification that involves the addition of an unfavorable outcome or stimulus following an undesirable behavior to decrease its occurrence.

Negative Punishment

A behavior modification technique where a favorable stimulus is removed after a certain behavior, decreasing the likelihood of that behavior occurring in the future.

Positive Reinforcement

A behavioral concept where a desirable stimulus is introduced following a behavior, increasing the likelihood that the behavior will occur again.