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

question 94

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 shown as follows:
The firm is considering switching to a 40 percent debt capital structure, and has determined that they would have to pay a 15 percent yield on perpetual debt. What will be the break-even level of EBIT?

• A)$11.2 million
• B)$9.5 million
• C)$13.0 million
• D)$15.0 million

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Definitions:

Trust

The confidence in the reliability, truth, ability, or strength of someone or something, crucial for building healthy relationships and effective teams.

Talented People

Individuals possessing exceptional skills, abilities, or knowledge in specific areas that contribute significantly to organizational or project success.

Leadership

The art of motivating a group of people towards achieving a common goal.

Coercive Power

A form of power that is based on the ability to deliver punishments or impose penalties.