Golden Inc. is considering shifting its capital structure by substituting debt i

Question

Golden Inc. is considering shifting its capital structure by substituting debt in the capital structure for common stock. At the debt ratio of 30%, the firm estimates that te average earnings per share (EPS) would be $3.12 and the standard deviation of EPS would be $2.83. If the marketplace has assigned the following required rate of returns to risky EPSs, what would be the stock price at this debt ratio level? (assume the zero-growth for the firm's earnings)

Coefficient of variation of EPS Estimated required rate of return
0.74 16%
0.78 18%
0.83 21%
0.91 24%

Explanation / Answer

coefficient of variation = standard deviation/average = 2.83/3.12 = 0.90705 ~ .91

there fore required rate = 24%

value of stock = EPS/required rate = 3.12/.24 = 13

Related Questions

Navigate

• Browse (All)
• Browse G
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.