AA Tours is comparing two capital structures to determine how to best finance its operations. The first option consists of all equity financing

The optimal capital structure has been achieved when the:    A.  debt-equity ratio is equal to 1. B.  weight of equity is equal to the weight of debt. C.  cost of equity is maximized given a pre-tax cost of debt. D.  debt-equity ratio is such that the cost of debt exceeds the cost of equity. E.  debt-equity ratio results in the lowest possible weighted average cost of capital. Refer to section 16.1

19.

AA Tours is comparing two capital structures to determine how to best finance its operations. The first option consists of all equity financing. The second option is based on a debt-equity ratio of 0.45. What should AA Tours do if its expected earnings before interest and taxes (EBIT) are less than the break-even level? Assume there are no taxes.    A.  select the leverage option because the debt-equity ratio is less than 0.50 B.  select the leverage option since the expected EBIT is less than the break-even level C.  select the unlevered option since the debt-equity ratio is less than 0.50 D.  select the unlevered option since the expected EBIT is less than the break-even level E.  cannot be determined from the information provided Refer to section 16.2

20.

You have computed the break-even point between a levered and an unlevered capital structure. Assume there are no taxes. At the break-even level, the:    A.  firm is just earning enough to pay for the cost of the debt. B.  firm's earnings before interest and taxes are equal to zero. C.  earnings per share for the levered option are exactly double those of the unlevered option. D.  advantages of leverage exceed the disadvantages of leverage. E.  firm has a debt-equity ratio of .50. Refer to section 16.2

21.

Which one of the following statements is correct concerning the relationship between a levered and an unlevered capital structure? Assume there are no taxes.    A.  At the break-even point, there is no advantage to debt. B.  The earnings per share will equal zero when EBIT is zero for a levered firm. C.  The advantages of leverage are inversely related to the level of EBIT. D.  The use of leverage at any level of EBIT increases the EPS. E.  EPS are more sensitive to changes in EBIT when a firm is unlevered. Refer to section 16.2