Question
NoNuns Cos. has a 21 percent tax rate and has $350 million in assets, currently financed entirely with equity. Equity is worth $37 per share,
NoNuns Cos. has a 21 percent tax rate and has $350 million in assets, currently financed entirely with equity. Equity is worth $37 per share, and book value of equity is equal to market value of equity. Also, lets assume that the firms 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:
| State | Recession | Average | Boom | |||||||||
| Probability of state | 0.25 | 0.55 | 0.20 | |||||||||
| Expected EBIT in state | $ | 5 | million | $ | 10 | million | $ | 17 | million | |||
The firm is considering switching to a 20-percent-debt capital structure and has determined that it would have to pay an 8 percent yield on perpetual debt in either event. What will be the standard deviation in EPS if NoNuns switches to the proposed capital structure and can take full advantage of the debt interest tax shields? (Do not round intermediate calculations and round your final answer to the nearest whole dollar amount.)
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Intermediate Accounting 2014 FASB Update
Authors: Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfield
15th edition
978-1118938782, 111893878X, 978-1118985311, 1118985311, 978-1118562185, 1118562186, 978-1118147290
