1. A firm is considering two different capital structures. The first option is an all-equity firm with 40,000 shares of stock. The second option is 28,000 shares of stock plus some debt. Ignoring taxes, the break-even level of earnings before interest and taxes between these two options is $52,000. How much money is the firm considering borrowing if the interest rate is 9 percent?
$175,000
$173,333
$208,333
$216,667
$225,000
2. Glass Growers has a cost of capital of 11.1 percent. The company is considering converting to a debt-equity ratio of .46. The interest rate on debt is7.3 percent. What would be the company’s new cost of equity? Ignore taxes.
12.85 percent
11.13 percent
12.36 percent
12.44 percent
11.61 percent