GTB , Inc.. has a 31 percent tax rate and has $100 million in assets, currently

Question

GTB , Inc.. has a 31 percent tax rate and has $100 million in assets, currently financed entirely with equity. Equity is worth $14 per share, and book value of equity is equal to market value of equity. Also, let's assume that the firm's expected values for EBIT depend on which state of the economy occurs tins year, with the possible values of EBIT and their associated probabilities as shown below The firm is considering switching to a 38 percent debt capital structure and has determined that they would have to pay a 10 percent yield on perpetual debt in either event What will be the level of expected EPS if it switches to the proposed capital structure? (Round your answer to 2 decimal places. Omit the "$" sign in your response.)

Explanation / Answer

Expected EBIT is calculated as below :- 45% * 6M = 2.7M 55% * 18.4M = 10.12M Expected EBIT = 2.7M + 10.12M = $12.82M Proposed Debt = 38%. As Assets are $100M, Debt will be $38M Int on Debt = 10% = 10%*$38M = $3.8M SO EBT = EBIT - Int on debt = 12.82-3.80 = $9.02M SO Net Income = EBT*(1-T) = $9.02M*(1-31%) = $6.22M No of shares = Equity capital/Share price = $62M/14 = 4.4286M So EPS = Net Income/Equity shares = $6.22M/4.4286M = $1.41 per share....Ans

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