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21.For an all-equity firm, A. as earnings before interest and taxes (EBIT)

Question : 21.For an all-equity firm, A. as earnings before interest and taxes (EBIT) : 1409507

 

21.For an all-equity firm, 
 
 

A. as earnings before interest and taxes (EBIT) increases, the earnings per share (EPS) increases by the same percentage

B. as EBIT increases, the EPS increases by a larger percentage

C. as EBIT increases, the EPS decreases at the same rate

D. as EBIT increases, the EPS decreases by a larger percentage

22.An EPS-operating income graph, for different debt ratios, shows the:

I) greater risk associated with debt financing, which is evidenced by a greater slope;
II) the break-even point where EPS of two different debt ratios are equal;
III) the minimum earnings needed to pay the debt financing for a given level of debt 
 
 

A. I only

B. II only

C. III only

D. I, II, and III only

23.According to an EPS-operating income graph, debt financing is the preferred outcome in the case when expected operating income is: 
 
 

A. less than the break-even income.

B. greater than the break-even income.

C. equal to the break-even income.

D. not able to be determined.

24.When comparing levered vs. unlevered capital structures, leverage works to increase EPS for high levels of operating income because interest payments on the debt: 
 
 

A. vary with EBIT levels.

B. stay fixed, leaving less income to be distributed over fewer shares.

C. stay fixed, leaving less income to be distributed over more shares.

D. stay fixed, leaving more income to be distributed over fewer shares.

25.In an EPS-operating income graphical relationship, the slope of the debt line is steeper than the equity line. The debt line has a negative intercept because: 
 
 

A. the break-even point is higher with debt.

B. a fixed interest charge must be paid even at low earnings.

C. the amount of interest per share has only a positive effect on the intercept.

D. the higher the interest rate, the greater the slope.

26.The effect of financial leverage on the performance of the firm depends on the: 
 
 

A. expected rate of return on equity.

B. firm's level of operating income.

C. current market value of the debt.

D. rate of dividend growth.

27.Health and Wealth Company is financed entirely by common stock that is priced to offer a 15% expected return. If the company repurchases 25% of the common stock and substitutes an equal value of debt yielding 6%, what is the expected return on the common stock after refinancing? (Ignore taxes.) 
 
 

A. 18.0%

B. 21.0%

C. 15.0%

D. 10.5%

28.Learn and Earn Company is financed entirely by common stock that is priced to offer a 20% expected return. If the company repurchases 50% of the stock and substitutes an equal value of debt yielding 8%, what is the expected return on its common stock after refinancing? 
 
 

A. 32%

B. 28%

C. 20%

D. 14%

29.Wealth and Health Company is financed entirely by common stock that is priced to offer a 15% expected return. The common stock price is $40/share. The earnings per share (EPS) is expected to be $6. If the company repurchases 25% of the common stock and substitutes an equal value of debt yielding 6%, what is the expected value of earnings per share after refinancing? (Ignore taxes.) 
 
 

A. $6.00

B. $7.52

C. $7.20

D. $6.90

30.Learn and Earn Company is financed entirely by common stock that is priced to offer a 20% expected rate of return. The stock price is $60 and the earnings per share are $12. If the company repurchases 50% of the stock and substitutes an equal value of debt yielding 8%, what is the expected earnings per share value after refinancing? 
 
 

A. $12.00

B. $19.20

C. $24.00

D. $15.60

 

 

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