Your Company Faces a 34 Percent Tax Rate and Has

question 41

Multiple Choice

Your company faces a 34 percent tax rate and has $150 million in assets, currently financed entirely with equity. Equity is worth $8 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 12 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)$0.49
• B)$1.08
• C)$1.31
• D)$1.67

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Definitions:

Synapses

The junctions through which neurons signal to each other or to non-neuronal cells such as those in muscles or glands.

Action Potential

A rapid increase and decrease in the voltage across a cellular membrane due to the movement of ions, allowing neurons to transmit signals.

Electrical Charge

A fundamental property of matter that causes it to experience a force when placed in an electromagnetic field, categorized into positive and negative types.

Millivolts

A unit of electric potential and electromotive force equal to one thousandth of a volt, commonly used in various electrical and physiological measurements.