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:

Change

The process or act of becoming different, which can occur in various contexts such as personal life, nature, or technology.

Private Distributor Brand

Products branded by a retailer for sale in its own stores, typically positioned as lower-cost alternatives to national brands.