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

question 19

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:
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 break-even level of EBIT?

• A)$20 million
• B)$23.75 million
• C)$42.5 million
• D)$75 million

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Definitions:

Output Per Head

The average production of goods and services per individual in a specific period, typically used to measure labor productivity.

Accelerated

A process or rate that increases speed or velocity, often used in various contexts such as economic growth or depreciation.

Industrial Revolution

The period of major industrialization that took place during the late 1700s and early 1800s, significantly changing the economy, society, and culture of the time through advancements in technology.

Technological Change

The process of innovation and development in technology, leading to new products, improved processes, and increased efficiency.