Question: State Pessimistic Optimistic Probability of state 0.45 0.55 Expected EBIT in state $ 1,700,000 $ 14,705,000 HiLo, Inc., doesnt face any taxes and has $53.125

State	Pessimistic		Optimistic
Probability of state		0.45		0.55
Expected EBIT in state	$	1,700,000	$	14,705,000

HiLo, Inc., doesnt face any taxes and has $53.125 million in assets, currently financed entirely with equity. Equity is worth $5 per share, and book value of equity is equal to market value of equity. Also, lets assume that the firms 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:

The firm is considering switching to a 20-percent-debt capital structure, and has determined that it would have to pay a 12 percent yield on perpetual debt in either event. What will be the standard deviation in EPS if the firm switches to the proposed capital structure?

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