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

question 69

Multiple Choice

Your company doesn't face any taxes and has $750 million in assets, currently financed entirely with equity. Equity is worth $25 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:
$$\begin{array} { c c c } \text { State } & \text { Pessimistic } & \text { optimistic } & \\\text { Probability of state } & 0.55 & 0.55 \\\text { Expected EBIT in state } & \$ 20 \text { million } & \$ 70 \text { million } \end{array}$$
The firm is considering switching to a 25 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 level of expected EPS if they switch to the proposed capital structure?

• A) $1.06
• B) $1.17
• C) $2.27
• D) $2.28

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Definitions:

Supply Chain

A system connecting a business with its providers to manufacture and supply a particular item to the ultimate consumer.

CPFR

Collaborative Planning, Forecasting, and Replenishment is a business practice where supply chain partners share information and resources to better predict customer demand and adjust supply accordingly.

Scalable

The ability of a system, model, or business to handle growing amounts of work or to be readily enlarged to accommodate that growth.

Behavioral Obstacles

Factors related to human behavior that hinder the efficient functioning of processes, decision-making, or achievement of goals.