1. Suppose a firm has an EBIT of 1,400,000 and finances its assets with 6,000,000 of debt at 6 percent interest and 300,000 shares of stock selling at 12.50 a share. To lessen the risk associated with this financial leverage, the firm is thinking about reducing its debt by 3,000,000 by selling more stock. The firm is in the 35 percent tax bracket. The change in capital structure won't have any effect on the firms operations, thus EBIT will remain at 1,400,000. What's the change in the firms EPS from this change in capital structure? A. EPS rises by 0.54 per share B. EPS rises by 0.28 per share C. EPS falls by 0.48 per share D. EPS falls by 0.36 per share
2. One-year Treasury bills currently yield 2.43 percent. You expect that one year from now, one-year Treasury bill rates will increase to 2.83 percent, and two years from now, one-year treasury bill rates will increase to 3.04 percent. The liquidity premium on two-year securities is 0.08 percent and on three year securities, 0.14 percent. If the liquidity premium theory is correct, what should the current rate be on three-year Treasury securities? A. 1.94 percent B. 2.84 percent C. 3.26 percent D. 2.68 percent.