The Diagram Below Shows Two Budget Deficit Functions for a Hypothetical

question 47

Multiple Choice

The diagram below shows two budget deficit functions for a hypothetical economy. FIGURE 31-2
-Refer to Figure 31-2.Initially,suppose real GDP is $100 million and the budget deficit is $14 million,as shown by point A.Which of the following events could result in a move from point A to point C?

• A)a fiscal expansion and an increase in GDP
• B)a fiscal contraction and an increase in GDP
• C)a fiscal expansion and a decrease in GDP
• D)a fiscal contraction and a decrease in GDP
• E)an increase in GDP with no change in fiscal policy

Evaluate the effect of restructuring operations through debt issue on share repurchase and earnings per share.

Estimate the firm's value with and without leverage under given tax rates.

Understand the relationship between expected EBIT, cost of capital, and the firm's weighted average cost of capital (WACC).

Identify the implications of different debt-equity ratios on a firm's cost of capital.

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Definitions:

Accounts Payable

Liabilities or amounts owed by a business to its creditors for goods and services that have been received but not yet paid for.

Accounts Receivable

Financial obligations of customers to a firm for items or services rendered but not yet compensated.

Face Value

Refers to the nominal or dollar value printed on a financial instrument, such as a bond or stock certificate, representing its legal value.

Bond

An interest-bearing security that obligates the issuer to pay the bondholder a specified sum of money, generally at fixed intervals, and to repay the principal at maturity.