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Assume that Firm A is an all-equity firm with total assets of $5,000 and the following distribution of EBIT for the coming year: Economy Average

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Assume that Firm A is an all-equity firm with total assets of $5,000 and the following distribution of EBIT for the coming year: Economy Average 50.00% Firm A Unlevered Probability | EBIT Interest EBT Taxes (40%) Net Income BEP ROA ROE 1 Bad 30.00% $500.00 $0.00 $500.00 -$200.00 $300.00 10.00% 6.00% 6.00% $0.00 $700.00 -$280.00 $420.00 14.00% 8.40% 8.40% Good 20.00% $900.00 $0.00 $900.00 -$360.00 $540.00 18.00% 10.80% 10.80% Now assume that the firm plans to issue $2,000 of debt, at an interest rate of 6.4 percent, and use the proceeds to repurchase equity (you may ignore potential impacts on price and assume that the firm will then have $3,000 of equity). Given this information, determine the coefficient of variation of the new ROE distribution. O 0.2536 0.2453 0.2370 0.2287 0.2204

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