1. Startup Milwaukee, Inc. has no debt outstanding, no depreciation, there are no taxes, and a total market value of $400,000. Earnings before interest and taxes, EBIT, are projected to be $20,000, if economic conditions are normal. There are currently 10,000 shares outstanding. Calculate earnings per share, EPS, for Startup Milwaukee before a potential plan for recapitalization.

Hint: NI = (EBIT Interest Taxes).

Group of answer choices

EPS = 2.00

EPS = 1.40

EPS = 0.875

EPS = 1.00

2. If a firm starts to pay large dividends, then:

Group of answer choices

it will increase its leverage.

it will reduce its D/E ratio.

it will reduce its leverage.

it will tend to have lower EPS in normal and great economic times.

3. Financial distress is a cost of having too much debt. Some firms find that customers are unwilling to buy products if the firm is rumored to be facing possible bankruptcy, because this will tend to nullify product warranties and the chance to return the product.

These lost sales are part of:

Group of answer choices

The indirect costs of financial distress

The costs of liquidating the firm

The direct cost of negotiating with creditors

The out of pocket legal cost of filing for bankruptcy