GTB, Inc., has a 20 percent tax rate and has $53.00 million in assets, currently
ID: 2753714 • Letter: G
Question
GTB, Inc., has a 20 percent tax rate and has $53.00 million in assets, currently financed entirely with equity. Equity is worth $5 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:
The firm is considering switching to a 20-percent-debt capital structure, and has determined that it would have to pay a 10 percent yield on perpetual debt in either event. What will be the level of expected EPS if GTB switches to the proposed capital structure?
State Pessimistic Optimistic Probability of state 0.45 0.55 Expected EBIT in state $ 3,498,000 $ 14,946,000Explanation / Answer
The company currently has = 53mn/5 = 10.6 mn shares
Now, the debt financing would be = 20% of 53=10.6 mn
Equity would be = 53 - 10.6 = 42.4 mn
New no of equity shares = 43.4 / 5 = 8.48 mn shares
Calculation Amount Expected EBIT 0.45*3498000 + 0.55*1496000 9794400 Interest 10% 0f 10.6 mn 1060000 EBT 8734400 Tax@20% 1746880 Earnings after tax 6987520 No of shares 848000 EPS 8.24Related Questions
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