HiLo, Inc, Doesn't Face Any Taxes and Has $100 Million in in Assets

question 44

Multiple Choice

HiLo, Inc., doesn't face any taxes and has $100 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 as shown below: The firm is considering switching to a 40 percent debt capital structure, and has determined that they would have to pay a 10 percent yield on perpetual debt. What will be the level of expected EPS if they switch to the proposed capital structure?

• A) $3.19
• B) $4.00
• C) $4.72
• D) $5.97

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Definitions:

Infancy

The period in a human's life from birth to 12 months old, characterized by rapid growth and development in physical, cognitive, and emotional domains.

Latin Roots

The base parts of words originally derived from Latin, which form the foundation of many English words and can offer clues to their meanings.

Psychosocial Development

A domain of human development that involves changes in individuals' interpersonal relationships, emotions, and social skills throughout the lifespan.

Trust Vs. Mistrust

A stage in Erik Erikson's theory of psychosocial development where infants learn to trust their caregivers and environment or develop mistrust based on their interactions.