Reference no: EM132614837

Problem 1: Which of the following statements is CORRECT?

As a firm increases the operating leverage used to produce a given quantity of output, this will:

a. normally lead to a reduction in its fixed assets turnover ratio.

b. normally lead to a decrease in its business risk.

c. normally lead to a decrease in the standard deviation of its expected EBIT.

d. normally lead to an increase in its fixed assets turnover ratio.

e. normally lead to a decrease in the variability of its expected EPS.

Problem 2:  Anson Jackson Court Company (AJC)

The Anson Jackson Court Company (AJC) currently has $200,000 market value (and book value) of perpetual debt outstanding carrying a coupon rate of 6%. Its earnings before interest and taxes (EBIT) are $100,000, and it is a zero growth company. AJC's current cost of equity is 8.8%, and its tax rate is 40%. The firm has 10,000 shares of common stock outstanding selling at a price per share of $60.00.

Refer to the data for the Anson Jackson Court Company (AJC). Now assume that AJC is considering changing from its original capital structure to a new capital structure with 50% debt and 50% equity. If it makes this change, its resulting market value would be $820,000. What would be its new stock price per share?

a. $59

b. $61

c. $60

d. $58

e. $62