Daddi Mac, Inc., doesn’t face any taxes and has $302.80 million in assets, curre

Question

Daddi Mac, Inc., doesn’t face any taxes and has $302.80 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 0.60 0.15 Expected EBIT in state $ 6,131,700 $ 11,279,300 $ 18,319,400 The firm is considering switching to a 25-percent-debt capital structure, and has determined that it would have to pay an 9 percent yield on perpetual debt regardless of whether it changes the capital structure. What will be the standard deviation in EPS if the firm switches to the proposed capital structure? (Do not round intermediate calculations and round your final answer to 2 decimal places.)

Explanation / Answer

Step 1:

Eps calculation in 3 cases:

Step 2: expected EPS:

Step 3: Standard deviation calculation:

Recession Average Boom EBIT 6,131,700 11,279,300          18,319,400 Interest: Total assets          302,800,000 Debt(25%)            75,700,000 Interest @9%               6,813,000 -6,813,000 -6,813,000 -6,813,000 EBT -681,300 4,466,300 11,506,400 Less: Taxes 0 0 0 A PAT -681,300 4,466,300 11,506,400 Number of equity shares: Total assets          302,800,000 Equity(75%)          227,100,000 Value per share                             30 B Number of equity shares               7,570,000          7,570,000          7,570,000             7,570,000 A/B EPS -0.09 0.59 1.52

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