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

question 86

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 10 percent yield on perpetual debt. What will be the level of expected EPS if they switch to the proposed capital structure?

• A)$7.24
• B)$6.94
• C)$5.59
• D)$5.67

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Definitions:

Contingency Contracts

Behavior modification strategy involving a written agreement between parties (typically in a therapeutic setting) outlining specific expectations and consequences.

Alcohol-Dependent

Refers to a medical condition known as alcoholism, characterized by a strong craving for alcohol, continued use despite harmful consequences, and inability to control drinking.

Alcohol Dehydrogenase

An enzyme that plays a role in the metabolism of alcohol, converting it into acetaldehyde.

BAL

Blood Alcohol Level, the concentration of alcohol in one's bloodstream, used to measure intoxication for legal and medical purposes.