Question
MountainHighhas selected a capital structure D/A = 0.75. Once the firm selects its target capital structure it envisions two possible scenarios for its operations: Feast
MountainHigh  has selected a capital structure D/A = 0.75. Once the firm selects its target capital structure it envisions two possible scenarios for its operations: Feast or Famine. The Feast scenario has a 50 percent probability of occurring and forecast EBIT in this state is $60,000. The Famine state has a 50 percent chance of occurring and the EBIT is expected to be $20,000. Further, the debt cost will be 12 percent. The firm will have $400,000 in total assets, it will face a 40 percent marginal tax rate, and the book value of equity per share under either scenario is $10.00 per share.
What is the coefficient of variation of expected EPS under the capital structure plan?
a. | 1.18 | |
b. | 3.76 | |
c. | 5.00 | |
d. | 2.88 | |
e. | 2.45 |
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The coefficient of variation CV is a measure of relative variability that indicates the risk per unit of return It is calculated as the ratio of the s...Get Instant Access to Expert-Tailored Solutions
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