Question

l New Home Telefleach Corporat. Gwinnett County, G. * W Social Behavioral... P digitakcommons.ute.. Help Save & Exh . Saved kam Your company doesn't face any taxes and has $756 million in assets, currently financed entirely with equity. Equity is worth $50.60 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. Average Boom State Probability of State Expect EBIT in State Recession 10 $106 million .75 15 $181 million $241 million oped 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:) Multiple Choice < Prey 17 of 25 Next > e here to search

Answer 1

Total Assets = $756,000,000

Value of Debt = 15% * Total Assets
Value of Debt = 15% * $756,000,000
Value of Debt = $113,400,000

Interest Expense = 11.00% * Value of Debt
Interest Expense = 11.00% * $113,400,000
Interest Expense = $12,474,000

Value of Equity = 85% * Total Assets
Value of Equity = 85% * $756,000,000
Value of Equity = $642,600,000

Number of Shares Outstanding = Value of Equity / Price per share
Number of Shares Outstanding = $642,600,000 / $50.60
Number of Shares Outstanding = 12,699,605

Recession Average Boom $ 106,000,000 $ 181,000,000 $ 241,000,000 $ 12,474,000 $ 12,474,000 $ 12,474,000 $ 93,526,000 $ 168,526,000 $ 228,526,000 State EBIT Less: Interest Expense EBT Less: Taxes Net Income Number of Shares EPS $ 93,526,000 $ 168,526,000 $ 228,526,000 12,699,605 12,699,605 12,699,605 $ 7.36 $ 13.27 $ 17.99

Expected EPS = 0.10 * $7.36 + 0.75 * $13.27 + 0.15 * $17.99
Expected EPS = $13.39

Variance = 0.10 * (7.36 - 13.39)^2 + 0.75 * (13.27 - 13.39)^2 + 0.15 * (17.99 - 13.39)^2
Variance = 6.82089

Standard Deviation = (6.82089)^(1/2)
Standard Deviation = $2.61