Standard Deviation in EPS after Leveraging with Taxes GTB, Inc., has a 34 percent tax rate and has $100 million in assets, currently financed entirely with equity. Equity is worth $7 per share, and book value of equity is equal to market value of equity. Also, let's assume that the firm's expected values for EBIT depend upon which state of the economy occurs this year, with the possible values of EBIT and their associated probabilities as shown below:

The firm is considering switching to a 40-percent-debt capital structure, and has determined that it would have to pay a 12 percent yield on per- petual debt in either event. What will be the standard deviation in EPS if it switches to the proposed capital structure? (LG4)

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State Pessimistic 0.45 Optimistic 0.55 $19 million Probability of state Expected EBIT in state $5 million