Your company doesn\'t face any taxes and has $764 million in assets, currently f
ID: 2821862 • Letter: Y
Question
Your company doesn't face any taxes and has $764 million in assets, currently financed entirely with equity. Equity is worth $51.40 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 11 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.)
2.62
6.38
14.08
13.57
State Recession Average Boom Probability of State .10 .75 .15 Expect EBIT in State $114 million $189 million $249 millionExplanation / Answer
Total capital = 764,000,000
Debt = 15% = 0.15*764,000,000 = 114,600,000
Total number of share before = 764,000,000/51.40 = 14,863,814 shares
Number of shares to be repurchases for debt issue = 114,600,000/51.40 = 2,229,572
Number of shares outstanding after debt issue = 14,863,814 - 2,229,572 = 12,634,242
EPS in recession =(114000000 - 114600000*0.11)/12634242 = 8.025/share
EPS in Average period = (189000000 - 114600000*0.11)/12634242 = 13.96/share
EPS in Boom = (249000000 - 114600000*0.11)/12634242 = 18.71/share
The std.deviation is clculated as follows:
Std.deviation in EPS = 2.62 (Option A)
State Probability EPS EPS - Expected EPS (EPS - Expected EPS)^2 (EPS - Expected EPS)^2* Prob. Recession 0.1 8.025 -6.055 36.663 3.666 Average 0.75 13.962 -0.119 0.014 0.011 Boom 0.15 18.711 4.630 21.439 3.216 Expected EPS 14.080 Variance 6.893 Std.deviation 2.625Related Questions
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