Your company doesn't face any taxes and has $258 million in assets, currently financed entirely with...

Your company doesn't face any taxes and has $258 million in assets, currently financed entirely with equity. Equity is worth $8.8 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 Pessimistic Optimistic

Probability of State .25 .75

Expect EBIT in State $18 million $58 million

The firm is considering switching to a 20-percent debt capital structure, and has determined that they would have to pay a 9 percent yield on perpetual debt in either event. What will be the level of expected 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.)

Expert Solution

Information given in the question is below -

Formulas are given below -
No. of shares outstanding = Market Value of Equity/ Price of 1 share
But Market Value of Equity = Book Value of Equity in this question
So, No. of shares outstanding = Book Value of Equity/ Price of 1 share

Total new debt = Existing Equity * Proposed Debt Percent
Interest Expense = Proposed Debt * yield on debt(or interest rate)

Profit Before Tax(PBT) = EBIT - Interest
Profit After Tax(PAT) = PBT - Tax

Probability Adjusted PAT = probability of scenario1*PAT of scenario1 + probability of scenario1*PAT of scenario1
Earning Per Share = PAT/No. of shares outstanding

Calculation formulas in excel are given below -

jeff jeffy answered 1 week ago

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