A Firm Is Analyzing Two Different Capital Structures for Financing

question 44

Multiple Choice

A firm is analyzing two different capital structures for financing a new asset that will cost $100,000.The effects of the two structures on the firm's balance sheet are described below.
Plan A: finance with 50% debt
Based on the information provided,we can conclude that:

• A)if the firm chooses Plan A,then any changes in the firm's EBIT will lead to larger fluctuations in the firm's EPS than if the firm chooses Plan B.
• B)if the firm chooses Plan B,then any changes in the firm's EBIT will lead to larger fluctuations in the firm's EPS than if the firm chooses Plan A.
• C)if the firm chooses Plan A,then any changes in the firm's EBIT will lead to the same fluctuations in the firm's EPS as will occur if the firm chooses Plan B.
• D)if the firm chooses Plan B,then any changes in the firm's EBIT will lead to smaller fluctuations in the firm's EPS than if the firm chooses Plan A.

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Definitions:

Federal Government

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Environmental Movement

A social and political effort to protect natural resources and ecosystems from degradation due to human activity, gaining significant traction in the late 20th century.

1968

a year marked by significant global upheaval, including protests, revolutions, and notable historical events affecting politics, civil rights, and the Vietnam War.

1980

The year marked by significant global and national events, including the inauguration of Ronald Reagan as President of the United States and the eruption of Mount St. Helens.