If a firm enters a sale and leaseback agreement, then:
I. the lessee will benefit from an immediate cash inflow.
II. both the lessor and the lessee may benefit if the lessor can benefit more from the tax
benefits of ownership than can the lessee.
III. the lease automatically becomes a nonrecourse lease.
IV. the lessee forfeits the right to repurchase the asset at a later date.
A. I and III only
B. II and IV only
C. I and II only
D. II and III only
E. III and IV only
ABC Co. and XYZ Co. are identical firms in all respects except for their capital
structure. ABC is all equity financed with $480,000 in stock. XYZ uses both stock and
perpetual debt; its stock is worth $240,000 and the interest rate on its debt is 11 percent.
Both firms expect EBIT to be $58,400. Ignore taxes. The cost of equity for ABC is
_____ percent, and for XYZ it is ______ percent.
A. 12.17; 12.68
B. 12.17; 12.94
C. 12.17; 13.33
D. 12.29; 12.68
E. 12.29; 13.33
You are considering a project that you believe is quite risky. To reduce any potentially
harmful results from accepting this project, you could:
A. lower the degree of operating leverage.
B. lower the contribution margin per unit.
C. increase the initial cash outlay.
D. increase the fixed costs per unit while lowering the contribution margin per unit.
E. lower the operating cash flow of the project.