Use the Following Information to Answer the Question(s) Below

question 46

Multiple Choice

Use the following information to answer the question(s) below.
Nielson Motors is currently an all equity financed firm. It expects to generate EBIT of $20 million over the next year. Currently Nielson has 8 million shares outstanding and its stock is trading at $20.00 per share. Nielson is considering changing its capital structure by borrowing $50 million at an interest rate of 8% and using the proceeds to repurchase shares. Assume perfect capital markets.
-Which of the following statements is false?

• A) The money taken in by the firm as a result of the share issue exactly offsets the dilution of the shares.
• B) Most analysts prefer to use performance measures and valuation multiples that are based on the firm's earnings before interest has been deducted.
• C) Because the firm's earnings per share and price-earnings ratio are affected by leverage implies that we can always reliably compare these measures across firms with different capital structures.
• D) In general, as long as the firm sells the new shares of equity at a fair price, there will be no gain or loss to shareholders associated with the equity issue itself.

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Definitions:

Cash Balance

The amount of cash that a company or individual has on hand at any given time.

Minimum Cash Balance

Minimum Cash Balance is the least amount of cash a company aims to hold in its register or account to meet emergency needs or unforeseen expenses.

Sales Collection

The process of retrieving payment for goods or services provided, typically managed through invoicing and accounts receivable procedures.

Operating Cycle

The period between the acquisition of inventory and the collection of cash from receivables, indicating the efficiency of a company's operations.