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

question 61

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 break-even level of EBIT?

• A)$7.25 million
• B)$7 million
• C)$10 million
• D)$11.2 million

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Definitions:

Triangular Theory

A theory of love proposed by psychologist Robert Sternberg, which suggests that love consists of three components: intimacy, passion, and commitment.

Commitment

The state or quality of being dedicated to a cause, activity, or person, often implying a long-term engagement or obligation.

Sternberg's

Refers to Robert Sternberg's triangular theory of love, which posits that love is comprised of three components: intimacy, passion, and commitment.

Triangular Theory

A theory proposed by psychologist Robert Sternberg that suggests love is composed of three components: intimacy, passion, and commitment.