A Firm Is Analysing Two Different Capital Structures for Financing

question 9

Multiple Choice

A firm is analysing 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
New asset $100,000 Debt $50,000
Ordinary equity $50,000
Total $100,000
Plan B: finance with 70% debt
New asset $100,000 Debt $70,000
Ordinary equity $30,000
Total $100,000
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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