GTB, Incorporated has a 21 percent tax rate and has $100 million in assets, currently financed entirely with equity. Equity is worth $7 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: State Probability of state Expected EBIT in state Pessimistic 0.45 $ 5 million Optimistic 0.55 $ 19 million The firm is considering switching to a 40-percent-debt capital structure, and has determined that it would have to pay a 12 percent yield on perpetual debt in either event. What will be the break-even level of EBIT? EBIT Note: Round intermediate calculations. Enter your answer in dollars not millions and round your final answer to the nearest whole dollar amount.
GTB, Incorporated has a 21 percent tax rate and has $100 million in assets, currently financed entirely with equity. Equity is worth $7 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: State Probability of state Expected EBIT in state Pessimistic 0.45 $ 5 million Optimistic 0.55 $ 19 million The firm is considering switching to a 40-percent-debt capital structure, and has determined that it would have to pay a 12 percent yield on perpetual debt in either event. What will be the break-even level of EBIT? EBIT Note: Round intermediate calculations. Enter your answer in dollars not millions and round your final answer to the nearest whole dollar amount.
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:GTB, Incorporated has a 21 percent tax rate and has $100 million in assets, currently financed entirely with equity. Equity is worth $7
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:
State
Probability of state
Expected EBIT in state
Pessimistic
EBIT
0.45
$5 million
Optimistic
0.55
$19 million
The firm is considering switching to a 40-percent-debt capital structure, and has determined that it would have to pay a 12 percent
yield on perpetual debt in either event. What will be the break-even level of EBIT?
Note: Round intermediate calculations. Enter your answer in dollars not millions and round your final answer to the nearest whole
dollar amount.
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