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

question 40

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. What is the net income of Banana without and with the debt?

• A) $500 and $484.2
• B) $484.2 and $500
• C) $500 and $465
• D) $490 and $500

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Definitions:

Cash Receipts

Represents the total cash inflows from transactions, including sales and asset dispositions, during a specific period.

Cash Payments

Financial transactions that involve the transfer of cash to settle a debt or purchase goods and services.

Separate Schedule

A detailed list or report that is prepared apart from the main financial statements or documents.

Noncash Expenses

Expenses reported on the income statement that do not involve actual cash flow, such as depreciation and amortization.