Your Company Doesn't Face Any Taxes and Has $5 Million

question 81

Multiple Choice

Your company doesn't face any taxes and has $5 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, 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:
$$\begin{array} { c c c c } \text { State } & \text { pessmistic } & \text { optimistic } \\\text { Probability of state } & 0.45 & 0.55 \\\text { Expected EBIT in state } & \$ 2 \text { million } & \$ 8 \text { million } \end{array}$$
The firm is considering switching to a 30 percent debt capital structure, and has determined that they would have to pay an 11 percent yield on perpetual debt in either event. What will be the level of expected EPS if they switch to the proposed capital structure?

• A) $9.67
• B) $7.33
• C) $6.91
• D) $4.84

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Definitions:

Opisthokont

A classification category that includes both fungi and animals, characterized by posterior flagella on swimming cells.

Collared Flagellates

Single-celled organisms with a distinctive collar around their flagellum, often considered an ancestral form to sponges.

Diverse Morphology

Refers to the variation in form and structure among organisms or parts of organisms within a population, species, or group.

Filaments

Long, thin structures found in many organisms, such as the stamen of flowers or muscle fibers, and are often involved in structural or motility functions.