In: Finance
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. |
3.76 |
|
b. |
2.45 |
|
c. |
5.00 |
|
d. |
2.88 |
|
e. |
1.18 |
Please refer to below spreadsheet for calculation and answer. Cell reference also provided.
Cell reference -