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Finance: Earnings per Share

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A firm does not face any taxes and has $250 million in assets, is currently financed entirely with equity. Equity is worth $25.00 per share, and book value of equity is equal to market value of equity. Assume that the firm's expected values for EBIT are dependent 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 20.00% debt capital structure, and has determined that they would have to pay an 7.50% yield on perpetual debt regardless of whether they change their capital structure. What will be the standard deviation in EPS if they switch to the proposed capital structure?

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Solution Summary

The problem set deals with issues under finance including earnings per share, break-even point etc.

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Chidi Ngene, M. Sc.
Education
  • B. Sc., University of Nigeria
  • M. Sc., London South Bank University
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