Galaxy Products Is Comparing Two Different Capital Structures,an All-Equity Plan

question 5

Multiple Choice

Galaxy Products is comparing two different capital structures,an all-equity plan (Plan I) and a levered plan (Plan II) .Under Plan I,Galaxy would have 178,500 shares of stock outstanding.Under Plan II,there would be 71,400 shares of stock outstanding and $1.79 million in debt outstanding.The interest rate on the debt is 10 percent and there are no taxes.What is the breakeven EBIT?

• A)$287,878.78
• B)$298,333.33
• C)$351,111.11
• D)$333,333.33
• E)$341,414.14

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Definitions:

Marginal Propensity

The portion of additional income that an individual is likely to spend on goods and services instead of saving.

Price Level

The average of current prices across the entire spectrum of goods and services produced in the economy, which can affect purchasing power and inflation.

Aggregate Expenditure Line

A graphical representation of the total spending in an economy, including consumption, investment, government, and net exports, at various levels of income.

Marginal Propensity

The proportion of an additional increment of income that is spent on consumption. It reflects the change in consumption resulting from a change in income.