Room and Board Has Determined That $36,000 Is the Break-Even

question 25

Multiple Choice

Room and Board has determined that $36,000 is the break-even level of earnings before interest and taxes for the two capital structures it is considering.The one structure consists of all equity with 14,000 shares of stock.The second structure consists of 10,000 shares of stock and $80,000 of debt.What is the interest rate on the debt?

• A)7.72 percent
• B)8.19 percent
• C)9.97 percent
• D)11.43 percent
• E)12.86 percent

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Definitions:

Accrual Basis

An accounting method where income and expenses are recorded when they are earned or incurred, regardless of when cash is exchanged.

Accounting Records

The documentation of all the financial transactions and positions of a business, kept for the purpose of financial reporting and auditing.

Cash Basis

An accounting method where revenues and expenses are recognized only when cash is received or paid out.

Incurred Expenses

Costs that have been recognized or consumed in the operations of a business, regardless of the payment status.