Daddi Mac, Inc., doesn’t face any taxes and has $251.60 million in assets, curre
ID: 2617362 • Letter: D
Question
Daddi Mac, Inc., doesn’t face any taxes and has $251.60 million in assets, currently financed entirely with equity. Equity is worth $32 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 as shown below: State Recession Average Boom Probability of state 0.20 0.55 0.25 Expected EBIT in state $ 5,535,200 $ 10,504,300 $ 17,549,100 The firm is considering switching to a 20-percent-debt capital structure and has determined that it would have to pay an 10 percent yield on perpetual debt in either event. What will be the level of expected EPS if the firm switches to the proposed capital structure? (Do not round intermediate calculations and round your final answer to 2 decimal places.) Expected EPS $
Explanation / Answer
Amount of debt to be taken=251.60*20%=50.32million
Amount of interest =50.32*10%=5.032million or 50320000
Amount of equity in New capital structure =251.60*80%=201.28million
No of equity shares =201.28/32=6.29million or 6290000
Calculation of expected EPS
Expected EPS will be 0.98 per share after change in Capital structure.
Particular probability EBIT Recession 5535200 .20 1007040 Avg 10504300 .55 5777365 Boom17549100 .25 4387275 Expected EBIT 11171680Related Questions
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