Daddi Mac, Inc., doesn't face any taxes and has $250 million in assets, currently financed entirely with equity. Equity is worth $20 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 shown as follows: State Recession Average Boom Probability of state Expected EBIT in state 0.20 0.60 0.20 $5 million $10 million $15 million The firm is considering switching to a 30 percent debt capital structure, and has determined that they would have to pay a 10 percent yield on perpetual debt. What will be the standard deviation in EPS if they switched to the proposed capital structure?
Daddi Mac, Inc., doesn't face any taxes and has $250 million in assets, currently financed entirely with equity. Equity is worth $20 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 shown as follows: State Recession Average Boom Probability of state Expected EBIT in state 0.20 0.60 0.20 $5 million $10 million $15 million The firm is considering switching to a 30 percent debt capital structure, and has determined that they would have to pay a 10 percent yield on perpetual debt. What will be the standard deviation in EPS if they switched to the proposed capital structure?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:TB MC Qu. 16-65 Daddi Mac, Inc., doesn't face any...
Daddi Mac, Inc., doesn't face any taxes and has $250 million in assets, currently financed entirely with equity. Equity is worth $20 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 shown as follows:
State
Recession
Average
Boom
Probability of state
Expected EBIT in state
0.20
0.60
0.20
$5 million $10 million $15 million
The firm is considering switching to a 30 percent debt capital structure, and has determined that they would have to pay a 10 percent yield on
perpetual debt. What will be the standard deviation in EPS if they switched to the proposed capital structure?
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