Triples is a small company looking at two possible capital structures. Currently

ID: 2660902 • Letter: T

Question

Triples is a small company looking at two possible capital structures. Currently, the firm is an all-equity firm

with $600,000 in assets and 100,000 shares outstanding. The market value of each share is $6.00. The CEO of Triples is

thinking of leveraging the firm by selling $300,000 of debt financing and retiring 50,000 shares, leaving 50,000 shares

outstanding. The cost of debt is 5% annually, and the current corporate tax rate for Triples is 30%. The CEO believes that

Triples will earn $50,000 per year before interest and taxes. Which of the statements below is TRUE?

A) Shareholders will be better off by $0.14 per share under a firm with $300,000 in debt financing versus a firm that is

all-equity.

B) 50/50 debt-to-equity EPS is $0.49.

C) All-equity EPS is $0.35.

D) Statements (A) through (C) are all true.

A) Shareholders will be better off by $0.14 per share under a firm with $300,000 in debt financing versus a firm that is

all-equity.

B) 50/50 debt-to-equity EPS is $0.49.

C) All-equity EPS is $0.35.

D) Statements (A) through (C) are all true.

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.