Problem 16-10 Spreadsheet Problem: Standard Deviation in EPS after Leveraging with Taxes (LG16-4) NoNuns Companies has a 21 percent tax rate and has $346.80 million in assets, currently financed entirely with equity. Equity is worth $34 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. Recession Standard deviation in EPS 0.25 $ 5,406,000 Average 0.55 $ 12,342,000 % Boom The firm is considering switching to a 25-percent-debt capital structure and has determined that it would have to pay an 8 percent yield on perpetual debt in either event. What will be the standard deviation in EPS if NoNuns switches to the proposed capital structure and can take full advantage of the debt interest tax shields? Note: Do not round intermediate calculations and round your final answer to the nearest whole dollar amount. 0.20 $ 19,380,000
Problem 16-10 Spreadsheet Problem: Standard Deviation in EPS after Leveraging with Taxes (LG16-4) NoNuns Companies has a 21 percent tax rate and has $346.80 million in assets, currently financed entirely with equity. Equity is worth $34 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. Recession Standard deviation in EPS 0.25 $ 5,406,000 Average 0.55 $ 12,342,000 % Boom The firm is considering switching to a 25-percent-debt capital structure and has determined that it would have to pay an 8 percent yield on perpetual debt in either event. What will be the standard deviation in EPS if NoNuns switches to the proposed capital structure and can take full advantage of the debt interest tax shields? Note: Do not round intermediate calculations and round your final answer to the nearest whole dollar amount. 0.20 $ 19,380,000
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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Cost of Capital
Shareholders and investors who invest into the capital of the firm desire to have a suitable return on their investment funding. The cost of capital reflects what shareholders expect. It is a discount rate for converting expected cash flow into present cash flow.
Capital Structure
Capital structure is the combination of debt and equity employed by an organization in order to take care of its operations. It is an important concept in corporate finance and is expressed in the form of a debt-equity ratio.
Weighted Average Cost of Capital
The Weighted Average Cost of Capital is a tool used for calculating the cost of capital for a firm wherein proportional weightage is assigned to each category of capital. It can also be defined as the average amount that a firm needs to pay its stakeholders and for its security to finance the assets. The most commonly used sources of capital include common stocks, bonds, long-term debts, etc. The increase in weighted average cost of capital is an indicator of a decrease in the valuation of a firm and an increase in its risk.
Question
Transcribed Image Text:Problem 16-10 Spreadsheet Problem: Standard Deviation in EPS after Leveraging with Taxes (LG16-4)
NoNuns Companies has a 21 percent tax rate and has $346.80 million in assets, currently financed entirely with equity. Equity is worth
$34 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
Recession
$5,406,000
Standard deviation in EPS
0.25
Average
0.55
$ 12,342,000
%
Boom
The firm is considering switching to a 25-percent-debt capital structure and has determined that it would have to pay an 8 percent
yield on perpetual debt in either event. What will be the standard deviation in EPS if NoNuns switches to the proposed capital structure
and can take full advantage of the debt interest tax shields?
Note: Do not round intermediate calculations and round your final answer to the nearest whole dollar amount.
0.20
$ 19,380,000
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