Question details

Finance standard deviation of eps and capital structure
$ 10.00

HiLo, Inc., doesn't face any taxes and has $57.8 million in assets, currently financed entirely with equity. Equity is worth $5 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 Pessimistic   Optimistic  
  Probability of state   0.45       0.55    
  Expected EBIT in state $ 1,907,400     $ 16,559,700    
 

 

The firm is considering switching to a 25-percent-debt capital structure, and has determined that it would have to pay a 9 percent yield on perpetual debt in either event. 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.)

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