Reference no: EM133056730

Question 1:

Terri, the CFO of OrrCraft, a manufacturer of high-priced fishing boats that primarily sells to middle income customers is concerned about the direction of the economy. She forecasts that there is a high probability of recession next year that will likely cut back sales and profits for recreational products. As a result, the massive increase in leverage the firm took on two years ago to finance an expansion into speed boats and pontoon boats must be addressed. She now expects that next year's actual EBIT will be less than the Breakeven EBIT she projected two years ago for the expansion. What is not the likely effect of excess leverage if her dire predictions are true?

Answer Choices:

• The variability of ROE and EPS will increase compared to when the firm had less leverage. 
• Earnings per Share (EPS) will decrease below her prior forecast. 
• All of these predictions are likely. 
• Return on Equity (ROE) will increase above her prior forecast

Question 2:

The CFO of Jamaican Juice Company (JJC) wants a lower cost of capital next year. What actions would help him achieve this?

Answer Choices: 

• The tax rate of JJC increases 
• The Market Risk Premium declines 
• The ratio of JJC's debt-to-equity is optimized
• All of these could contribute to a lower cost of capital
• The beta of JJC declines
• Refinance bank debt with a lower interest rate
• The Federal Reserve lowers the Ten-year Treasury Note Yield