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MountainHigh  has selected a capital structure D/A = 0.75. Once the firm selects its target capital structure...

MountainHigh  has selected a capital structure D/A = 0.75. Once the firm selects its target capital structure it envisions two possible scenarios for its operations: Feast or Famine. The Feast scenario has a 50 percent probability of occurring and forecast EBIT in this state is $60,000. The Famine state has a 50 percent chance of occurring and the EBIT is expected to be $20,000. Further, the debt cost will be 12 percent. The firm will have $400,000 in total assets, it will face a 40 percent marginal tax rate, and the book value of equity per share under either scenario is $10.00 per share.

What is the coefficient of variation of expected EPS under the capital structure plan?

a.

1.18
b.

3.76
c.

5.00
d.

2.88
e.

2.45
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Answer #1

Answer:

Correct answer is:

c.

5.00

Explanation:

Workings:

As such option c is correct and other options a, b, d and e are incorrect

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