# Question

Daddi Mac, Inc., doesn’t face any taxes and has $290 million in assets, currently financed entirely with equity. Equity is worth $37 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 shown as follows:

STATE

RECESSION

AVERAGE

BOOM

Probability of state

0.25

0.55

0.20

Expected EBIT in state

$5 million

$10 million

$17 million

The firm is considering switching to a 20 percent debt capital structure, and has determined that they would have to pay an 8 percent yield on perpetual debt in either event. What will be the level of expected EPS if they switch to the proposed capital structure?

STATE

RECESSION

AVERAGE

BOOM

Probability of state

0.25

0.55

0.20

Expected EBIT in state

$5 million

$10 million

$17 million

The firm is considering switching to a 20 percent debt capital structure, and has determined that they would have to pay an 8 percent yield on perpetual debt in either event. What will be the level of expected EPS if they switch to the proposed capital structure?

## Answer to relevant Questions

HiLo, Inc., doesn’t face any taxes and has $150 million in assets, currently financed entirely with equity. Equity is worth $7 per share, and book value of equity is equal to market value of equity. Also, let’s assume ...NoNuns Cos. has a 25 percent tax rate and has $350 million in assets, currently financed entirely with equity. Equity is worth $37 per share, and book value of equity is equal to market value of equity. Also, let’s ...Suppose a firm announces a new dividend amount every year with the first quarterly dividend declaration, but never explicitly states that the dividend will be continued for the other three quarters of the year. However, in ...Suppose that a firm always announces a yearly dividend at the end of the first quarter of the year, but then pays the dividend out as four equal quarterly payments. If the next such “annual” dividend has been announced ...What is the difference between a fixed-rate and a floating-rate loan?Post your question

0