A firm does not face any taxes and has $250 million in assets, is currently financed entirely with equity.
Equity
is worth $25.00 per share, and book value of equity is equal to market value of equity.
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:
Assets
$250,000,000.00
Current Market Price
$25.00
Number of shares
Interest Rate
7.50%
Debt %
40.00%
Equity %
60.00%
Interest
STATE
RECESSION
AVERAGE
BOOM
Probability
0.30
0.50
0.20
Expected EBIT
$2,500,000.00
$10,000,000.00
$22,500,000.00
- Interest
EBT
-Taxes
0.00%
Net Income
EPS
Expected EPS
A firm does not face any taxes and has $250 million in assets, is currently financed entirely with equity.
Equity is
worth $25.00 per share, and book value of equity is equal to market value of equity.
Assume that the firm's
expected values for EBIT are dependent 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 20.00% debt capital structure, and has determined that they would have to pay an 7.50%
yield on perpetual debt regardless of whether they change their capital structure.
What will be the standard deviation in EPS if
they switch to the proposed capital structure?
Assets
$250,000,000.00
Current Market Price
$25.00
Number of shares
Interest Rate
7.50%
Debt %
20.00%
Equity %
80.00%
Interest
STATE
RECESSION
AVERAGE
BOOM
Probability
0.30
0.50
0.20
Expected EBIT
$2,500,000.00
$10,000,000.00
$22,500,000.00
- Interest
EBT
-Taxes
0.00%
Net Income
EPS
Expected EPS
Standard Deviation
A firm has a 25.00% tax rate and has $250 million in assets, is currently financed entirely with equity.
Equity is
worth $25 per share, and book value of equity is equal to market value of equity.
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 20.00% debt capital structure, and has determined that they would have to pay an 7.50%
yield on perpetual debt in either event.
What will be the level of expected EPS and the standard deviation of EPS?
Assets
$250,000,000.00
Current Market Price
$25.00
Number of shares
Interest Rate
7.50%
Debt %
20.00%
Equity %
80.00%
Interest
STATE
RECESSION
AVERAGE
BOOM
Probability
0.30
0.50
0.20
Expected EBIT
$2,500,000.00
$10,000,000.00
$22,500,000.00
- Interest
EBT
-Taxes
25.00%
Net Income
EPS
Expected EPS
Standard Deviation
A firm has a 25.00% tax rate and has $250 million in assets, is currently financed entirely with equity.
Equity is worth
$25.00 per share, and book value of equity is equal to market value of equity.
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 20.00% debt capital structure, and has determined that they would have to pay an 7.50%
yield on perpetual debt in either event.
What will be the break-even level of EBIT?
Assets
$250,000,000.00
Current Market Price
$25.00
Number of shares without Debt
Number of shares with Debt
Interest Rate
7.50%
Debt %
20.00%
Equity %
80.00%
Interest
Tax Rate
25.00%
EBIT Breakeven