Corporate finance

1 Daddi Mac, Inc, doesn’t face any taxes and has $37750 million in assets, currently financed entirely with equity Equity is worth $40 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

State

Recession

Average

Boom

Probability of state

025

055

020

Expected EBIT in state

$5,285,000

$11,385,000

$18,346,500

 

The firm is considering switching to a 20-percent-debt capital structure, and has determined that it would have to pay an 8 percent yield on perpetual debt regardless of whether it changes the capital structure What will be the standard deviation in EPS if the firm switches to the proposed capital structure?

Solution:

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