Your company doesn\'t face any taxes and has $761 million in assets, currently f
ID: 2745403 • Letter: Y
Question
Your company doesn't face any taxes and has $761 million in assets, currently financed entirely with equity. Equity is worth $51.10 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 25-percent debt capital structure, and has determined that they would have to pay a 8 percent yield on perpetual debt in either event. What will be the standard deviation in 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.)
6.67
3.85
14.42
14.84
State Recession Average Boom Probability of State .25 .60 .15 Expect EBIT in State $111 million $186 million $246 millionExplanation / Answer
Total Number of Shares = $761 Million / $51.10
= 14892368
proposed capital structure
The firm is considering switching to a 25-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 75%
On 100% Capital = ($761Million / 85)*100 = $ 895294118
than Debt Capital = $895294118 - $ 761,000,000 = $134294118
Expected EBIT = 0.25*111 + 0.6*186 + 0.15*246
= 27.75 + 111.6 + 36.9
= 176.25 million
Expected EPS
Particulars amount Expected EBIT 176250,000 Less : Interest on Debt Capital (8%*134294118) 10743529 Earnings After Interest 165506471 EPS = EAIT / No of Shares $ 11.11Related Questions
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