Question

Daddi Mac, Inc., doesn’t face any taxes and has $251.60 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: State Recession Average Boom Probability of state 0.20 0.55 0.25 Expected EBIT in state $ 5,535,200 $ 10,504,300 $ 17,549,100 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 in either event. What will be the level of expected EPS if the firm switches to the proposed capital structure? (Do not round intermediate calculations and round your final answer to 2 decimal places.) Expected EPS $

Answer 1

Particular	probability	EBIT
Recession 5535200	.20	1007040
Avg 10504300	.55	5777365
Boom17549100	.25	4387275
	Expected EBIT	11171680

Amount of debt to be taken=251.60*20%=50.32million

Amount of interest =50.32*10%=5.032million or 50320000

Amount of equity in New capital structure =251.60*80%=201.28million

No of equity shares =201.28/32=6.29million or 6290000

Calculation of expected EPS

Particular	Amount
Expected EBIT	11171680
Less interest	5032000
Earnings available for equityholders(a)	6139680
No of equity share(b)	6290000
Expected EPS(a/b)	0.98

Expected EPS will be 0.98 per share after change in Capital structure.