Question $4$

Expected EPS after Leveraging

A$.$ Poke$-$N$-$Greens, Inc., doesn't pay any taxes and has

$$18,500,000$ in assets, currently financed entirely with equity.

Equity is worth $$50$ 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:

What is their expected EPS?

N$/$B Formula:

Expected Earnings $=$ sum of $($probability $x$ Expected

Earnings$)$

B$.$ The firm is considering switching to a $10-$percent debt capital

structure, and has determined that they would have to pay a

$10$ percent yield on perpetual debt in either event. What will

be the expected EPS if they switch to the proposed

capital structure?