Copybold Corporation Copybold Corporation Is a Start-Up Firm Considering Two Alternative Capital

question 24

Multiple Choice

Copybold Corporation
Copybold Corporation is a start-up firm considering two alternative capital structures⎯one is conservative and the other aggressive. The conservative capital structure calls for a D/A ratio = 0.25, while the aggressive strategy call for D/A = 0.75. Once the firm selects its target capital structure it envisions two possible scenarios for its operations: Feast or Famine. The Feast scenario has a 60 percent probability of occurring and forecast EBIT in this state is $60,000. The Famine state has a 40 percent chance of occurring and the EBIT is expected to be $20,000. Further, if the firm selects the conservative capital structure its cost of debt will be 10 percent, while with the aggressive capital structure its debt cost will be 12 percent. The firm will have $400,000 in total assets, it will face a 40 percent marginal tax rate, and the book value of equity per share under either scenario is $10.00 per share

-Refer to Copybold Corporation.What is the difference between the EPS forecasts for Feast and Famine under the conservative capital structure?

• A) $1.00
• B) $0.80
• C) $2.20
• D) $0.44
• E) $0

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Definitions:

Decline

A decrease in quantity, quality, or strength over a period, often observed in economic indicators, stock prices, or physical capacities.

Interest Rate

The proportion of a loan that is charged as interest to the borrower, typically expressed as an annual percentage of the loan outstanding.

Present Value

The current worth of a future sum of money or stream of cash flows, given a specified rate of return.

Payment Stream

Payment stream refers to a series of payments made over time, such as in an annuity, loan repayments, or any regular monetary transfers.