Firewall Corp

question 93

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 Donat is 30%. The CEO believes that Donat 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) 50/50 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) through (C) are all true.

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Definitions:

Multiple Market Segments

Dividing a market into distinct groups of buyers with different needs or characteristics, and tailoring marketing strategies for each segment.

Winnie-the-Pooh

A fictional character and a series of children's books created by English author A.A. Milne, featuring a friendly, yellow bear who loves honey.

Geographic Segmentation

Dividing a market into different geographical units such as nations, states, regions, or cities.

Zip Code

A series of letters, numbers, or both, assigned to different areas to facilitate mail delivery and identify locations specifically in the United States.