nonuns FINANCE FA-OTR-T HW. Wk 10 CH 16 Assessing L-T Debt and Equity Capital St
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nonuns FINANCE FA-OTR-T HW. Wk 10 CH 16 Assessing L-T Debt and Equity Capital Structure, 19 International Finance Question, 3(of 10) 3. 300 pints NoNuns Cos has a 20 percent tax rate and has $301.60 million in assets, currently financed entirely with equity Equity is worth $30 per share, and book value of equity is equal to market value of equity. Also, lets 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 probabilises as shown below Probablity of state Expected EBIT in state 0.25 $5,749250 0.60 11,498,500 Boom 18,001,750 0.15 The firm is considering switching to a 25-percent-debt capital structure, and has determined that it would have to pay an 10 percent yield on perpetual debt in either event. What will be the standard devlation in EPS I NoNuns switches to the proposed capital structure? (Do not round intermediate calculations and round your final answer to 2 decimal places.) deviation in E Hints References Book& Resources tint. Hint 2 Hint 3 Hin 84 bites Type here to search CE 456-÷ 1 2 3Explanation / Answer
All equity:
Assets=Equity=301.6 million
25% debt:
Debt=301.6*25%=75.4 million
Equity=301.6*75%=226.2 million
Number of shares=226.2/30=7.54 million
Interest=75.4*10%=7.54 million
Recession EPS: As EBIT is less than interest, EPS=0
Average EPS:(11498500-7.54*10^6)/(7.54*10^6)=0.525
Boom EPS:(18001750-7.54*10^6)/(7.54*10^6)=1.3875
Expected EPS=0.25*0+0.6*0.525+0.15*1.3875=0.523125
Standard deviaiton in EPS=sqrt(0.25*(0-0.523125)^2+0.6*(0.525-0.523125)^2+0.15*(1.3875-0.523125)^2)=0.42484=42.484%
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