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:

Functional Depreciation

The decrease in the usefulness or value of an asset due to advancements in technology or changes in market demands, rather than physical wear and tear.

Fixed Asset

Long-term tangible assets that a company uses in its operations to generate income, such as buildings, machinery, and vehicles, which are not typically sold in the course of business.

Interest on Construction Loan

The interest that accrues on a loan taken out to finance the construction of a building or other project, traditionally capitalized and added to the project's cost base.

Expense Account

A type of account used in accounting to track money spent or costs incurred by a business in its operational activities.