Question: At accounting breakeven quantity of output, a. payback period is beyond the life of the project b. net income equals to zero and operating cash

At accounting breakeven quantity of output,

	a.	payback period is beyond the life of the project
	b.	net income equals to zero and operating cash flow equals depreciation
	c.	IRR is negative and NPV equals zero
	d.	IRR equals the cost of capital

McGilla has decided to sell a new line of golf clubs. The clubs will sell for $1,600 per set (i.e., per unit), have a variable cost of $700 per set and fixed costs each year will be $600,000. The plant and equipment required will cost $1.2 million and will be depreciated straight-line to zero book value over 8-year life. If the required return on the project is 14 percent and tax rate is zero (i.e.,ignore taxes):

What is the cash break-even level of output for this project?

	a.	556 units
	b.	667 units
	c.	528 units
	d.	593 units

Plan I (All-equity or No Debt Plan)

Plan II (Levered Plan or Plan with debt)

Shares outstanding = 240,000 shares

Debt = $0

Shares outstanding = 160,000 shares

Debt = $1 million @ interest rate = 10%

Calculate the EPS under each plan if EBIT is $500,000.

	a.	$3.5; $3.6
	b.	$2.08; $2.5
	c.	$3.5; $2.5
	d.	$2.08; $3.6

The proposition that the value of levered firm is higher than the value of unlevered firm by the amount of interest tax shield is called:

	a.	M&M Proposition I with corporate taxes
	b.	M&M Proposition II with no tax
	c.	the law of one price
	d.	M&M Proposition I with no tax

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