Firewall Corp

question 33

Multiple Choice

Firewall Corp.is a small company looking at two possible capital structures.Currently,the firm is an all-equity firm with $900,000 in assets and 100,000 shares outstanding.The market value of each share is $9.00.The CEO of Firewall is thinking of leveraging the firm by selling $270,000 of debt financing and retiring 30,000 shares,leaving 70,000 shares outstanding.The cost of debt is 6% annually,and the current corporate tax rate for Firewall is 30%.The CEO believes that Firewall will earn $100,000 per year before interest and taxes.Which of the statements below is TRUE?

• A)All-equity EPS is $0.70.
• B)30/70 debt-to-equity EPS is $0.838.
• C)Shareholders will be better off by almost $0.14 per share under a firm with $270,000 in debt financing versus a firm that is all-equity.
• D)Statements A,B,and C are all true.

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Definitions:

First Ace

The initial occurrence of an ace in a series of card draws or during a specific card-related activity.

Probability

A numerical expression between 0 and 1 that represents the probability of a particular event happening.

Cards

Pieces of heavy paper or thin cardboard, typically rectangular in shape, used for playing a variety of games.

At Least

Indicates the minimum quantity or the smallest amount possible or required.