Business Finance Homework Help

Top Up is a levered firm with assets valued at $300,000, has $25,000 of debt issued at 7% interest, and 2,000 shares of stock outstanding. Suppose that corporate profits are subject to a tax rate of 25%. Which of the following comes closest to the earnings before interest and tax (EBIT) of Top Up if its earnings per share (EPS) is $0.50?

Select one:

a. $1,226

b. $3,750

c. $3,083

d. $1,508

e. $1,753

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Question 2

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Why do firms with leverage, all else equal, pay less tax than forms without leverage?

Select one:

a. Because firms with negative net income don’t owe any taxes.

b. Because risk units are higher with levered firms.

c. Because interest is a tax deductible expense.

d. Because of homemade leverage.

e. Because firms with leverage have fewer shares outstanding.

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Mid-State BankCorp recently declared a 7-for-2 stock split. Prior to the split, the stock sold for $100 per share. If the firm’s total market value is unchanged by the split, what will the stock price be following the split?

Select one:

a. $26.29

b. $35.71

c. $25.43

d. $28.86

e. $28.57

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Golden Inc. is a firm with a stock price of $50 per share. The firm has decided to not pay the usual dividend of $1.50 per share. Jones, a shareholder on the record of Golden, has 500 shares that she purchased some time ago for $5.00 per share. Jones needs cash and decides to create for herself the $750 dividend by selling some of her shares of Golden. Which of the following comes closest to the TOTAL AMOUNT OF TAXES that Jones must pay on the sale if the tax rate on capital gains is 20%?

Select one:

a. $85

b. $135

c. Given the facts as presented, there is no tax due on the sale.

d. $50

e. $150

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Question 5

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Which of the following actions will have the result of increasing financial leverage in the firm? In each case, assume that all other activity in the firm does not change.

Select one:

a. A 2 for 1 stock split

b. An increase in the firm’s retained earnings account

c. A new debt issue

d. A new equity issue

e. A shift of $100 from cash to inventory

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Question 6

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You own 100 shares of Troll Brothers’ stock, which currently sells for $120 a share. The company is about to declare a 2-for-1 stock split. Which of the following best describes your likely position after the split?

Select one:

a. You will have 50 shares of stock, and the stock will trade at or near $600 a share.

b. You will have 50 shares of stock, and the stock will trade at or near $120 a share.

c. You will have 200 shares of stock, and the stock will trade at or near $60 a share.

d. You will have 200 shares of stock, and the stock will trade at or near $120 a share.

e. You will have 100 shares of stock, and the stock will trade at or near $60 a share.

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Howard holds 3,000 shares in Bean, a firm with a stock price of $30. Bean has announced a dividend of $1.50 per share that will go ex-dividend tomorrow. Howard doesn’t need cash and so he’d prefer not to have any dividend. Which of the following is closest to the action would you suggest for Howard immediately after the stock goes ex-dividend? Assume perfect markets.

Select one:

a. Buy 163.64 shares of Bean

b. Buy 157.90 shares of Bean

c. Buy 36,000 shares of Bean

d. Sell 36,000 shares of Bean

e. Buy 272.73 shares of Bean

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You work for the CEO of a new company that plans to manufacture and sell a new type of laptop computer. The issue now is how to finance the company, with only equity or with a mix of debt and equity. Expected operating income is $690,000. Other data for the firm are shown below. How much higher or lower will the firm’s expected EPS be if it uses some debt rather than only equity, i.e., what is EPSL – EPSU?
 0% Debt, U 60% Debt, LOper. income (EBIT)$690,000 $690,000Required investment$2,500,000 $2,500,000% Debt0.0% 60.0%$ of Debt$0.00 $1,500,000$ of Common equity$2,500,000 $1,000,000Shares issued, $10/share250,000 100,000Interest rateNA 10.00%Tax rate35% 35%

Select one:

a. $1.63

b. $1.29

c. $2.23

d. $1.72

e. $1.97

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Simon and Simon, makers of cell phones, has a history of paying a dividend of $1 per share to their shareholders. Which of the following describes the likely response to the per share price of Simon and Simon with respect to the dividend?

Select one:

a. The stock price will not rise nor fall on any of these dates

b. The stock price will fall by more than $1 on the record data

c. The stock price will fall by $1 on the ex-dividend date

d. The stock price will rise by $1 on the ex-dividend date

e. The stock price will rise by more than $1 on the record date

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Which of the following statements is CORRECT?

Select one:

a. When firms are deciding on the size of stock splits–say whether to declare a 2-for-1 split or a 3-for-1 split, it is best to declare the smaller one, in this case the 2-for-1 split, because then the after-split price will be higher than if the 3-for-1 split had been used.

b. Back before the SEC was created in the 1930s, companies would declare reverse splits in order to boost their stock prices. However, this was determined to be a deceptive practice, and reverse splits are illegal today.

c. When a company declares a stock split, the price of the stock typically declines–for example, by about 50% after a 2-for-1 split–and this necessarily reduces the total market value of the firm’s equity.

d. If a firm’s stock price is quite high relative to most stocks–say $500 per share–then it can declare a stock split of say 20-for-1 so as to bring the price down to something close to $25. Moreover, if the price is relatively low–say $2 per share–then it can declare a “reverse split” of say 1-for-10 so as to bring the price up to somewhere around $20 per share.

e. Stock splits create more administrative problems for investors than stock dividends, especially determining the tax basis of their shares when they decide to sell them, so today stock dividends are used far more often than stock splits.