Question: ) Although Aspeon's EBIT is expected to be $32 million, there is a great deal of uncertainty in the estimate, as indicated by the following

) Although Aspeon's EBIT is expected to be $32 million, there is a great deal of uncertainty in the estimate, as indicated by the following probability distribution

Probability EBIT

0.25 10,000,000

0.50 32,000,000

0.25 54,000,000

Assume that Aspeon had only two capitalisation alternatives: Either an all-equity capital structure with $120 million of stock or $60 million of 13 percent debt plus $60 million of equity.

a. Conduct a ROE analysis.

b. Now calculate the return on equity (ROE) and times-interest-earned (TIE) ratio for each alternative at each EBIT level.

c. Finally, discuss the risk/return tradeoffs under the two financing alternatives. In your discussion, consider the expected ROE and the standard deviation of ROE under each alternative.

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