Your company doesn\'t face any taxes and has $263 million in assets, currently f

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.)

O $2.13

O $3.25

O $1.63

O $2.46

State Pessimistic Optimistic   Probability of State .20 .80   Expect EBIT in State $23 million $63 million

Explanation / Answer

Present number of shares = 263/9.3 i.e 28.27957 million shares

Expected EBIT = ( 23*0.20)+(63*0.80)

= 55 million

New capital structure

15% Debt i.e 263*15% i.e 39.45 million

Amount financed by equity = 263-39.45 i.e 223.55

Number of shares in new capital structure =223.55/9.3 i.e 24.037634

EPS is closest to 2.13

Particulars Plan A Earning Before Interest and Tax       55,000,000.00 Less: Interest         3,945,000.00 Earnng available for equty shareholders       51,055,000.00 Outstanding equity shares       24,037,634.00 Earning Per Share                          2.13

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