Daddi Mac, Inc., doesn’t face any taxes and has $249.20 million in assets, curre
ID: 2743566 • Letter: D
Question
Daddi Mac, Inc., doesn’t face any taxes and has $249.20 million in assets, currently financed entirely with equity. Equity is worth $30 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
0.25
0.55
0.20
Expected EBIT in state
$
6,292,300
$
11,214,000
$
18,191,600
The firm is considering switching to a 25-percent-debt capital structure and has determined that it would have to pay an 8 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.)
Daddi Mac, Inc., doesn’t face any taxes and has $249.20 million in assets, currently financed entirely with equity. Equity is worth $30 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:
Explanation / Answer
Daddi Mac. Inc. All Amounts in $ Weighted EBIT with given states of probability State Probability EBIT Weighted EBIT Recession 0.25 62,92,300 1573075 Average 0.55 1,12,14,000 6167700 Boom 0.2 1,81,91,600 3638320 Total Weighted EBIT 11379095 Total Value of Assets 249200000 Debt out of this amount @ 25% 62300000 Interest paid on Debt @ 8% 4984000 Ajdusted EBIT after interest on Debt 6395095 Original Book Value of Equity 249200000 Revised Equity Value @ 75% 186900000 Book Value per Share 30 No. of shares outstanding 6230000 EPS or Earnings Per Share = Adjusted EBIT / Revised No. of Shares outstanding = 6,395,095 / 6,230,000 = 1.03 $ per share
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