The CFO of Ink Imagination (II) wants to calculate next year's EPS using different leverage ratios. II's total assets are $5 million, and its marginal tax rate is 40 percent. The company has estimated next year's EBIT for three possible economic states: $1.2 million with a 0.2 probability, $800,000 with a 0.5 probability, and $500,000 with a 0.3 probability. (1) Calculate II's expected EPS, standard deviation, and coefficient of variation for each of the following capital structure. (2) What capital structure should the firm choose to lower the firm's risk? Leverage (Debt/Assets) 20% Shares of Stock Outstanding 300,000 200,000 Interest Rate 6% 50 10
The CFO of Ink Imagination (II) wants to calculate next year's EPS using different leverage ratios. II's total assets are $5 million, and its marginal tax rate is 40 percent. The company has estimated next year's EBIT for three possible economic states: $1.2 million with a 0.2 probability, $800,000 with a 0.5 probability, and $500,000 with a 0.3 probability. (1) Calculate II's expected EPS, standard deviation, and coefficient of variation for each of the following capital structure. (2) What capital structure should the firm choose to lower the firm's risk? Leverage (Debt/Assets) 20% Shares of Stock Outstanding 300,000 200,000 Interest Rate 6% 50 10
Chapter12: Capital Structure
Section: Chapter Questions
Problem 7PROB
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Transcribed Image Text:The CFO of Ink Imagination (II) wants to calculate next year's EPS using different leverage
ratios. II's total assets are $5 million, and its marginal tax rate is 40 percent. The company has
estimated next year's EBIT for three possible economic states: $1.2 million with a 0.2
probability, $800,000 with a 0.5 probability, and $500,000 with a 0.3 probability. (1) Calculate
II's expected EPS, standard deviation, and coefficient of variation for each of the following
capital structure. (2) What capital structure should the firm choose to lower the firm's risk?
Leverage (Debt/Assets)
20%
Shares of Stock Outstanding
300,000
200,000
Interest Rate
6%
50
10
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