1. The DOL measures the percentage change in ____ given a percentage change in ____.

A) Fixed costs; sales

B) Profits; fixed costs

C) Profits; sales

D) Operating leverage; fixed costs

2. Income that is measured after the adjustment for the cost of capital is called:

A) Operating income

B) Operating profit

C) Accounting income

D) economic profit

3. Monroe Inc. is an all-equity firm with 500,000 shares outstanding. It has $2,000,000 of EBIT, and EBIT is expected to remain constant in the future. The company pays out all of its earnings, so earnings per share (EPS) equal dividends per share (DPS), and its tax rate is 40%. The company is considering issuing $4,500,000 of 9.00% bonds and using the proceeds to repurchase stock. The risk-free rate is 4.5%, the market risk premium is 5.0%, and the firm's beta is currently 1.10. However, the CFO believes the beta would rise to 1.30 if the recapitalization occurs. Assuming the shares could be repurchased at the price that existed prior to the recapitalization, what would the price per share be following the recapitalization? (Hint: P0 = EPS/rs because EPS = DPS.)

a. $21.44

b. $34.52

c. $28.12

d. $29.51

e. $27.84