With no taxes, $100m in assets, financed entirely with equity. Equity is worth $50 per share, book value of equity is equal to market value. Expected EBIT depends on which state of economy occurs.
Probability of state .33. and .67
Expected EBIT. $8 Milliion. $15 million
Firm is considering switching to 40% debt capital structure, and gad determined that they would pay a 10% yield on perpetual debt. What will be the standard deviation in EPS if they switch to the proposed structure.