1. Southern Wind is an all-equity firm with 25,300 shares of stock outstanding and a total market value of $373,000. Based on its current capital structure, the firm is expected to have earnings before interest and taxes of $36,500 if the economy is normal, $22,400 if the economy is in a recession, and $50,600 if the economy booms. Ignore taxes. Management is considering issuing $94,300 of debt with an interest rate of 7 percent. If the firm issues the debt, the proceeds will be used to repurchase stock. What will the earnings per share be if the debt is issued and the economy booms?
$2.52
$2.33
$2.69
$2.03
$1.58
2. What are the arithmetic and geometric average returns for a stock with annual returns of 15 percent, 9 percent, –7 percent, and 14 percent?
7.37%; 7.75%
7.75%; 11.20%
11.20%; 7.75%
11.20%; 7.37%
7.75%; 7.37%