Question 4 (of t0 3.00 points GTB, Inc., has a 20 percent tax rate and has $85,9

Question

Question 4 (of t0 3.00 points GTB, Inc., has a 20 percent tax rate and has $85,956,000 in assets, currently financed entirely with equity Equity ls worth $6 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 Probability of state Expected EBIT in state $550 million $ 19.50 million 0.50 0.50 The irm is considering switching to a 25-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 break-even level of EBIT? (Enter your answer in dollars, not in millions. Do not round intermediate calculations and round your final answer to the nearest whole dollar amount.) Hints Reterences eBook & Resources Hint#1 Hint u2 Hint#3 Hint #4 O Type here to search 789 ×% CE 456-÷ 1 2 3 ON

Explanation / Answer

All Equity:
Equity=Assets=85956000
Number of shares=85956000/6=14326000
Let EBIT be x
EPS=x*(1-tax rate)/14326000

25% debt:
Debt=25%*85956000=21489000
Interest=21489000*10%=214890=0.21489 million
Equity=85956000-21489000=64467000
Number of shares=64467000/6=10744500
Let EBIT be x
EPS=(x-214890)*(1-tax rate)/10744500

These two EPS will be the same at breakeven EBIT
=>(x-214890)/10744500=x/14326000
=>0.25x=214890
=>x=859560

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