Volga Publishing Is Considering a Proposed Increase in Its Debt

question 3

Multiple Choice

Volga Publishing is considering a proposed increase in its debt ratio,which would also increase the company's interest expense.The plan would involve issuing new bonds and using the proceeds to buy back shares of its common stock.The company's CFO thinks the plan will not change total assets or operating income but that it will increase earnings per share (EPS) .Assuming the CFO's estimates are correct,which of the following statements is correct?

• A)Since the proposed plan increases Volga's financial risk, the company's share price still might fall even if EPS increases.
• B)If the plan reduces the WACC, the share price is also likely to decline.
• C)Since the plan is expected to increase EPS, this implies that net income is also expected to increase.
• D)If the plan does increase the EPS, the share price will automatically increase at the same rate.

Identify the advantages and disadvantages of sole proprietorships.

Comprehend the taxation dynamics for partnerships and sole proprietorships.

Recognize the decision-making processes and control in different business forms.

Understand the capital raising and liability aspects of partnerships versus sole proprietorships.

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Definitions:

Gift Tax

A tax on the transfer of assets or money from one person to another without receiving something of equal value in return, in excess of annual and lifetime exemptions.

Section 1231

A tax provision that allows for the preferential tax treatment of gains and losses on the sale or exchange of business property and assets held for more than one year.

Depreciation

An accounting method used to allocate the cost of a tangible or physical asset over its useful life, reflecting wear and tear, deterioration, or obsolescence.

FMV

The Fair Market Value represents the price at which property would be sold in an open market scenario.