A Firm Issues 100,000 Shares of Common Stock with a Total

question 28

Multiple Choice

A firm issues 100,000 shares of common stock with a total market value of $5,000,000 and an equal amount of debt.The firm is expected to generate $1.5 million in operating income and pay $250,000 in interest.If the firm does not pay tax,what will happen to EPS if the firm repurchases $2,500,000 of shares and substitutes an equal amount of additional debt?

• A) EPS decreases by 33.3% to $10.00.
• B) EPS decreases by 6.7% to $11.67.
• C) EPS increases by 20% to $15.00.
• D) EPS increases by 80% to $22.50.

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Definitions:

Contraceptive Approach

Methods or strategies used to prevent pregnancy as a part of family planning.

Abstinence

The practice of abstaining from indulging in a habit or substance, especially alcohol, drugs, or sexual activity.

Seminiferous Tubule

The highly coiled tubules within the testes where spermatogenesis, the process of sperm production, occurs.

Vas Deferens

The duct that conveys sperm from the testicle to the urethra in male mammals.