Sophie Corporation Expects EBIT of $50 Million If There Is

question 21

Essay

Sophie Corporation expects EBIT of $50 million if there is a recession, $100 million if the economy is normal, and $150 million if the economy expands.Olive Corporation also expects EBIT of $50 million if there is a recession, $100 million if the economy is normal, and $150 million if the economy expands.Sophie is financed entirely with equity while Olive is financed 50% with debt at 10%.Sophie has $200 million in equity; Olive is financed with $100 million of debt and $100 million of equity.The tax rate is 30%.Both firms pay out all available earnings as dividends.If there is a recession, compare dividends and total distributions to investors for each company.