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(solution) Daddi Mac, Inc., doesn't face any taxes and has $302.80 million


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.)

 

  Standard deviation in EPS $    



Assets

 

Equity

 

Price per share

 

No. of shares $302,800,000

 

$302,800,000

 

$30

 

10,093,333 Proposed capital structure

 

Debt

 

Equity

 

Value of debt

 

Value of equity

 

New no. of shares

 

Interest rate on debt...

 


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Sep 13, 2020

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