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.

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Definitions:

Rose

A type of flowering plant belonging to the genus Rosa, in the family Rosaceae, known for its beauty and fragrance; often symbolizes love and affection.

Doubled

Increased by 100 percent; made twice as large or numerous.

Quadrupled

Quadrupled in amount or worth.

Trade Deficit

A situation that occurs when a country imports more goods and services than it exports, resulting in a negative balance of trade.