1. Kelso Electric is debating between a leveraged and an unleveraged capital structure. The all equity capital structure would consist of 24,000 shares of stock. The debt and equity option would consist of 16,000 shares of stock plus $260,000 of debt with an interest rate of 8 percent. What is the break-even level of earnings before interest and taxes between these two options? Ignore taxes.
$37,440.00
$29,952.00
$26,208.00
$62,400.00
$33,696.00
2. If the implied default probability on a 1-year credit default swap is 39.35%, and the swap spread is 750 bps. what is the recovery rate?
(a) 14.37%; (b) 9.52%; (c) 29.47%; (d) 38.27%