Why Choose Us?
0% AI Guarantee
Human-written only.
24/7 Support
Anytime, anywhere.
Plagiarism Free
100% Original.
Expert Tutors
Masters & PhDs.
100% Confidential
Your privacy matters.
On-Time Delivery
Never miss a deadline.
Daddi Mac, Inc
Daddi Mac, Inc. doesn't face any taxes and has $303.20 million in assets, currently financed entirely with equity. Equity is worth $32 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: Recession Boom State Probability of state Expected EBIT in state Average 0.55 0.20 0.25 $5,386,000 $10,612,000 $17,661,400 The firm is considering switching to a 20-percent-debt capital structure, and has determined that it would have to pay an 10 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.) Standard deviation in EPS
Expert Solution
Here standard deviation in E.P.S. is required, so at first E.P.S. will be calculated as follows :-
Calculation of E.P.S. :- ( amount $ in millions.)
Ressession Average Boom
E.B.I.T. 5.306 10.612 17.6614
Less : Interest (@ 10%) (W.N. 1) 6.064 6.064 6.064
E.B.T. -0.758 4.548 11.5974
Less: tax (since tere is no tax) 0.00. 0.00 0.00
E.A.T. -0.758 4.548 11.5974
Number of Shares 9.475 9.475 9.475
Earning Per Share (E.P.S)= -0.08 0.48 1.224
(E.A.T. / Number of shares)
CALCULATION OF STANDARD DEVIATION IN E.P.S :-
1. 2. 3. 4. 5. 6.
State Probability (prob.) E.P.S. E.P.S. * Prob. (E.P.S.*Prob.) - (Sum of column 4) ( Column 5 ) *(column 5) * Prob.
Recession 0.20 - 0.08 -.016 -0.49 0.04802
Average 0.55 0.48 0.264 0.07 0.0027
Boom 0.25 1.224 0.306 0.814 0.1656
Total 0.41 0.21632
The value in column 6 is the Variance of E.P.S.
Thus standard deviation = root value of 0.21632 = 0.4651 or 0.47. Answer.
Working note 1.:-
value of debt = 20% of the value of equity.
so debt value = 20% of $ 303.20 million = $ 60.64 million
interest rare of debt is taken as 10 % , so interest is 10 % of 60.64.
Working note 2 :-
Number of shares = total share capital / price per share.
= 303.20/32 = 9.475 million shares.
NOTE :-
E.B.I.T. means Earnings before interest and tax.
E.B.T. means Earnings before tax
E.A.T. means Earnings after tax
Standard deviation is the square root value of Variance.
Archived Solution
You have full access to this solution. To save a copy with all formatting and attachments, use the button below.
For ready-to-submit work, please order a fresh solution below.
