Suppose That Banana Computers Has $1,000 in Revenue This Year

question 22

Multiple Choice

Suppose that Banana Computers has $1,000 in revenue this year, along with COGS of $400 and SG&A of $100. The required rate of return on its equity is 14%, and the risk-free rate is 5%. Assume that the COGS only include the marginal costs of selling a computer. Banana is considering adding $700 worth of debt with a coupon rate of 5% and an YTM of 7.9% to its capital structure. Suppose, revenues fall by $300, what is the percent change in net income with and without the debt? Assume that the total variable production costs remain the same. (Round the answer to one decimal places.)

• A) 64.5% and 60%
• B) 60.0% and 64.5%
• C) 59.2% and 40.8%
• D) 40.8% and 59.2%

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