A Firm Is Analyzing Two Possible Capital Structures-30 and 50

question 170

Multiple Choice

A firm is analyzing two possible capital structures-30 and 50 percent debt ratios. The firm has total assets of $5,000,000 and common stock valued at $50 per share. The firm has a marginal tax rate of 40 percent on ordinary income. The number of common shares outstanding for each of the capital structures would be ________.

• A) 30 percent debt ratio: 30,000 shares and 50 percent debt ratio: 50,000 shares
• B) 30 percent debt ratio: 50,000 shares and 50 percent debt ratio: 70,000 shares
• C) 30 percent debt ratio: 70,000 shares and 50 percent debt ratio: 100,000 shares
• D) 30 percent debt ratio: 70,000 shares and 50 percent debt ratio: 50,000 shares

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Definitions:

Service Department Costs

The expenses incurred by support departments within a company that do not directly contribute to profit but provide necessary services.

Operating Departments

Sections or divisions within a business that are responsible for carrying out its core operations, as opposed to support or administrative departments.

Direct Method

A way of preparing a cash flow statement where actual cash flows from operating activities are listed directly.

Service Department Costs

Expenses associated with departments that do not directly produce goods but provide support services, such as maintenance or security.