Donat Corp

question 56

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) through (C) are all true.

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Definitions:

Terminal Ganglia

Nerve endings located near or within the organs they innervate, part of the autonomous nervous system.

Preganglionic Neurons

Neurons of the autonomic nervous system that originate in the central nervous system and travel to autonomic ganglia where they synapse with postganglionic neurons.

Autonomic Ganglion

A cluster of nerve cell bodies in the autonomic nervous system that regulates involuntary functions such as heart rate and digestion.

Somatic Motor System

Part of the peripheral nervous system that transmits signals from the central nervous system to skeletal muscles, facilitating voluntary muscle movements.