Copybold Corporation Is a Start-Up That Has a Capital Structure

question 47

Multiple Choice

Copybold Corporation is a start-up that has a capital structure that calls for a debt/assets ratio of 0.75. There are two possible scenarios with respect to the firm's operations: Feast andFamine. The Feast scenario has a 60 percent probability of occurring, and the forecast earnings before interest and taxes (EBIT) in this scenariois $60,000. The Famine scenariohas a 40 percent chance of occurring, and the EBIT is expected to be $20,000. Further, the cost of debt for this capital structure will be 12 percent. The firm will have $400,000 in total assets, and it will face a marginal tax rate of 40 percent. The company has 10,000 outstanding shares. What is the difference between the earnings per share (EPS) forecasts for Feast and Famine?

• A) $0
• B) $2.40
• C) $1.48
• D) $0.62
• E) $0.98

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