Your Girlfriend Plans to Start a New Company to Make

question 24

Multiple Choice

Your girlfriend plans to start a new company to make a new type of cat litter.Her father will finance the operation,but she will have to pay him back.You are helping her,and the issue now is how to finance the company,with equity only or with a mix of debt and equity.The price per unit will be $10.00 regardless of how the firm is financed.The expected fixed and variable operating costs,along with other information,are shown below.How much higher or lower will the firm's expected EPS be if it uses some debt rather than only equity,i.e.,what is EPS_L − EPS_U? ​

• A)$0.54
• B)$0.60
• C)$0.67
• D)$0.75
• E)$0.83

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Definitions:

Cost Curve

A graphical representation showing the cost of producing different levels of output.

Economies of Scale

The reduction in the cost per unit that companies experience as a result of their large scale of operations, usually seeing these expenses decrease as the scale grows.

Diseconomies of Scale

An economic concept where, beyond a certain point, an increase in the scale of production leads to a rise in average costs per unit due to inefficiencies.

Long Run

A term in economics referring to a period wherein all inputs can be adjusted, including those that are typically fixed in the short run.