The CEO of Ink Imagination (II) wants to calculate next years EPS using different leverage ratios. IIs total assets are $5 million, and its marginal tax rate is 40 percent. The company has estimated next year years EBIT for three possible economic states: $1.2 million with a 0.2 probability, $800,000 with a 0.5 probability, and $500,000 with a 0.3 probability. Calculate IIs expected EPS, standard deviation, and coefficient of variation for each of the following capital structures. Which capital structure do you recommend and why?

• Total Assets = $5,000,000
• Marginal Tax Rate = 40%
• Estimated EBIT
  • Possibility 1: $1,200,000 with a .2 probability
  • Possibility 2: $800,000 with a .5 probability
  • Possibility 3: $500,000 with a .3 probability

Determine:

Leverage (Debt to Assets)	Interest Rate	Shares of Stock Outstanding
20%	6%	300,000
50%	10%	200,000

Earnings per Share?

Standard Deviation?

Coefficient of Variation?