Bristal Boats, Inc reports sales of 4,000,000, variable costs of 500,000, fixed operating costs of
1,250,000, and interest expense of 350,000. The corporation's EBIT is 3,250,000 and its marginal
tax rate is 30.
If the corporation is able to increase its sales by 25, then
A) its EBIT will increase by more than 25 and its EPS will increase by less than 25.
B) its EBIT will increase by more than 25 and its EPS will increase by more than the percentage
increase in EBIT.
C) its EBIT will increase by 25 and its EPS will increase by 25.
D) its EBIT and EPS will both increase, but less than 25 due to fixed costs and taxes.
Question 2
Valley Flights, Inc has a capital structure made up of 40 debt and 60 equity and a tax rate of
30. A new issue of 1,000 par bonds maturing in 20 years can be issued with a coupon of 9 at a
price of 1,098.18 with no flotation costs.
The firm has no internal equity available for investment at
this time, but can issue new common stock at a price of 45. The next expected dividend on the
stock is 2.70. The dividend for the firm is expected to grow at a constant annual rate of 5 per year
indefinitely. Flotation costs on new equity will be 7.00 per share. The company has the following
independent investment projects available:
Project Initial Outlay IRR
1 100,000 10
2 10,00 8.5
3 50,000 12.5
Which of the above projects should the company take on?
A) Projects 1 and 3 B) Project 3 only
C) Projects 1 and 2 D) Projects 1, 2 and 3
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