1. New Mexico Lumber recently reported that its earnings per share were $3.00. The company has 400,000 shares of stock outstanding. The company's interest expense was $500,000. The corporate tax rate is 40 percent. What was the company's operating income (EBIT)?
a. $ 980,000
b. $1,220,000
c. $2,000,000
d. $2,500,000
e. $3,500,000
2. Companies with high ratios of fixed costs to total project value tend to have higher betas.
True
False
3. Stocks differ from bond because____
a. Bond cash flows are known while cash flows are uncertain.
b. Firms pay bond cash flows prior to paying taxes while stock cash flows are after-tax.
c. The ending par value of a bond is known at purchase while the ending value of a share of stock is unknown at purchase.
d. All of the above.