Your company doesn\'t face any taxes and has $263 million in assets, currently f
ID: 2743385 • Letter: Y
Question
Your company doesn't face any taxes and has $263 million in assets, currently financed entirely with equity. Equity is worth $9.3 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 as shown below:
The firm is considering switching to a 15-percent debt capital structure, and has determined that they would have to pay a 10 percent yield on perpetual debt in either event. What will be the level of expected EPS if they switch to the proposed capital structure? (Round your intermediate calculations and final answer to 2 decimal places except calculation of number of shares which should be rounded to nearest whole number.)
Explanation / Answer
For Calculate EPS we have first findout Total Number of shares
As Per Given Information book value of equity is equal to market value of equity and Company Asstes is entirely Finance by equity
Total Number of Shares = $263 Million / $9.3Market-Book Value per share
= 28,279,570
proposed capital structure
The firm is considering switching to a 15-percent debt capital structure , here assume which is after proposed capital stucture (and not reducing current equity portion)
than remaining is equity portion is present $263Million which is 85%
On 100% Capital = $263Million / 85% = $ 309,411,765
than Debt Capital = $309,411,765 - $ 263,000,000 = $46,411,765
Now Expected EBIT = $23 (0.2) + $63 (0.8) = $55Million
Expected EPS
Particulars amount Expected EBIT 55,000,000 Less : Interest on Debt Capital (10%* 46,411,765) 4,641,177 Earning After IT 50,358,823 EPS = EAIT / No of Shares $ 1.78Related Questions
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