q19

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: Firm A Unlevered Probability EBIT Interest Taxes (40%) Bad 30.00% $500.00 $0.00 $500.00 -$200.00 $300.00 10.00% 6.00% 6.00% Economy Average 50.00% $700.00 $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% Net Income BEP ROA ROE 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 form will then have $3,000 of equity) . Given this information, determine the standard deviation of the new ROE distribution. 0 2653% 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 standard deviation of the new ROE distribution. 0 2.653% 0 2800% 03.098% 0 3.487% 03.774%