A Firm Has a Current Capital Structure Consisting of $400,000

question 197

Multiple Choice

A firm has a current capital structure consisting of $400,000 of 6 percent annual interest debt and 50,000 shares of common stock.The firm's tax rate is 21 percent on ordinary income.If the EBIT is expected to be $200,000,two EBIT-EPS coordinates for the firm's existing capital structure are ________.

• A)($24,000,$0)and ($200,000,$0.74)
• B)($24,000,$0)and ($200,000,$2.78)
• C)($0,$24,000)and ($200,000,$1.82)
• D)($24,000,$0)and ($200,000,$3.52)

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Definitions:

Put Bond

A type of bond that allows the holder to force the issuer to buy back the bond at specified times before maturity.

Deferred Call Provision

A clause in a bond contract that prohibits the issuer from repurchasing the bond until a specified date has passed.

Callable Bond

A type of bond that can be redeemed by the issuer before its maturity date at a specified price.

Redemption

The process by which securities or financial instruments are converted into cash or its equivalent value.