Question
Your company faces a 21 percent tax rate and has $150 million in assets, currently financed entirely with equity. Equity is worth $8 per share,
Your company faces a 21 percent tax rate and has $150 million in assets, currently financed entirely with equity. Equity is worth $8 per share, and book value of equity is equal to market value of equity. Also, let's assume that the firm's expected values for EBIT depend upon which state of the economy occurs this year, with the possible values of EBIT and their associated probabilities shown as follows:
| State | Pessimistic | Optimistic | ||||||
| Probability of state | 0.3 | 0.7 | ||||||
| Expected EBIT in state | $ | 15 | million | $ | 40 | million | ||
The firm is considering switching to a 25 percent debt capital structure, and has determined that they would have to pay a 12 percent yield on perpetual debt in either event. What will be the standard deviation in EPS if they switch to the proposed capital structure?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started
Financial Accounting The Impact On Decision Makers
Authors: Gary A Porter, Curtis L Norton
7th Edition
1439080526, 9781439080528
