Your Company Doesn't Face Any Taxes and Has $750 Million

question 25

Multiple Choice

Your company doesn't face any taxes and has $750 million 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 shown as follows:
$$\begin{array} { c c c c } \text { State } & \text { Recession } & \text { Average } & \text { Boom } \\\text { Probability of state } & 0.15 & 0.65 & 0.20 \\\text { Expected EBIT in state } & \$ 100 \text { million } & \$ 175 \text { million } & \$ 235 \text { million }\end{array}$$
The firm is considering switching to a 30 percent debt capital structure, and has determined that they would have to pay a 9 percent yield on perpetual debt in either event. What will be the standard deviation in EPS if they switch to the proposed capital structure?

• A) 3.76
• B) 9.15
• C) 14.17
• D) 83.79

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Definitions:

Monoglycerides

Molecules made of one fatty acid attached to a glycerol backbone, important as emulsifiers in food production.

Small Intestine

A part of the gastrointestinal tract where most of the digestion and absorption of nutrients occurs.

Carbohydrate

Molecule that consists mainly of carbon, hydrogen, and oxygen atoms in a 1:2:1 ratio. A sugar, or a polymer of sugars (e.g., cellulose, starch, glycogen).

Chemical Digestion

The process of breaking down food into smaller, absorbable components using enzymes, acids, and other substances in the digestive system.