Final Exam – December 11, 2007 - SOLUTION
- Time allowed:
- Aids allowed:
None except for an 8’1/2” by 11’ double sided cheat sheet and a calculator
- The exam is out of
- There are
40 multiple choice questions. Each multiple choice question is worth 1 mark.
- The remaining
non-multiple choice questions are worth 30 marks.
- Answer all multiple choice questions on the marksense sheet.
- Answer all non-multiple choice questions in the space provided.
- Please put your name, student number, and professor’s name on the front of this exam
questionnaire AND at the top of the non-multiple choice section.
- Print or write VERY NEATLY.
If I can’t read your writing, your answers won’t get marked.
1. If the number of shares for an all equity firm = 200,000, the number of shares if the firm is half debt and half
equity is 100,000, and the interest cost for the firm if it is half debt and half equity is $1,000,000, then what is the
firm’s breakeven EBIT?
Assume that there are no taxes.
None of the above
Let EBIT = X
(X / 200,000) = (X - $1,000,000) / 100,000
Solving for X yields $2,000,000
2. If the firm in the prior question does not achieve its breakeven EBIT (i.e., earns less than its breakeven EBIT),
which of the following statements is most true?
The firm will have a higher EPS if it has debt in its capital structure in comparison to being an all
The firm will have a higher EPS if is an all equity firm in comparison to having debt in its capital
The firm will have the same EPS regardless of whether it has debt in its capital structure or not
The firm will have a negative EPS
3. If a firm’s EPS is $12/share, there are 12,000,000 shares, no interest costs, and a 50% tax rate, what is the firm’s