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

---

Definitions:

Natural Processes

The organic and inherent procedures and events occurring in the environment and the physical world.

Unfavorable Norms

Social rules that are perceived negatively by society or certain groups, often because they lead to undesired outcomes.

Understaffed Teams

Teams that operate with fewer members than are necessary to effectively manage the workload or achieve the team's goals.

Task Engagement

The degree of attention, interest, and effort that a person brings to bear on a particular task or activity.