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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.

3.76
b.

2.45
c.

5.00
d.

2.88
e.

1.18

Solutions

Expert Solution

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

Cell reference -

jeff jeffy answered 2 years ago
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