AA Tours Is Comparing Two Capital Structures to Determine How

question 92

Multiple Choice

AA Tours is comparing two capital structures to determine how to best finance its operations.The first option consists of all equity financing.The second option is based on a debt-equity ratio of 0.45.What should AA Tours do if its expected earnings before interest and taxes (EBIT) are less than the break-even level? Assume there are no taxes.

• A)select the leverage option because the debt-equity ratio is less than 0.50
• B)select the leverage option since the expected EBIT is less than the break-even level
• C)select the unlevered option since the debt-equity ratio is less than 0.50
• D)select the unlevered option since the expected EBIT is less than the break-even level
• E)cannot be determined from the information provided

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Definitions:

Excise Tax

is a tax levied on the sale of specific goods or services, like fuel, tobacco, and alcohol, usually to discourage their use or generate revenue.

Payroll Taxes

Taxes imposed on employers and employees, based on the wages paid to employees, used to fund social security and other programs.

Corporate Income Tax

A tax levied by governments on the profits earned by corporations and businesses.

Armored Personnel Vehicles

Military vehicles designed to transport personnel and equipment in combat zones, providing protection against ballistic and explosive threats.