Choose option a,b,c,d,e for the following:
Question 5 –
Jimmy Shoes Inc. has 10,000 shares outstanding with a stock price of $40 per share. It also carries long – term debt of $200,000 at an interest rate of 7% p.a. One of the agenda items in its AGM is to switch to a D/E of 1. Based on this information, which of the following is false?
a. Jimmy can repurchase 2,500 shares to make its D/E = 1.
b. The value of the firm is currently $600,000.
c. The value of the firm will increase if more debt is added to the capital structure.
d. Jimmy can borrow an additional $100,000 to make its D/E = 1.
e. The Break – Even EBIT will be $42,000.