________ is the value of the firm's ownership in the event that all assets are sold for their exact accounting value and the proceeds remaining after paying all liabilities (including preferred stock) are divided among common stockholders.
A) Liquidation value
B) Book value
C) The P/E multiple
D) The present value of the common stock
Question 2
The MAX Corporation is planning a 4,000,000 expansion this year. The expansion can be financed by issuing
either common stock or bonds.
The new common stock can be sold for 60 per share. The bonds can be issued
with a 12 percent coupon rate. The firm's existing shares of preferred stock pay dividends of 2.00 per share.
The company's corporate income tax rate is 46 percent. The company's balance sheet prior to expansion is as
follows:
MAX Corporation
Current Assets 2,000,000
Fixed Assets 8,000,000
Total Assets 10,000,000
Current Liabilities 1,500,000
Bonds:
(8, 1,000 par value) 1,000,000
(10, 1,000 par value) 4,000,000
Preferred Stock:
(100 par value) 500,000
Common Stock:
(2 par value) 700,000
Retained Earnings 2,300,000
Total Liabilities and Equity 10,000,000
a. Calculate the indifference level of EBIT between the two plans.
b. If EBIT is expected to be 3 million, which plan will result in higher EPS?
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