The CEO 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 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. Calculate II's expected EPS, standard deviation, and coefficient of variation for each of the following capital structures. Which capital structure do you recommend and why?
- Total Assets = $5,000,000
- Marginal Tax Rate = 40%
- Estimated EBIT
- Possibility 1: $1,200,000 with a .2 probability
- Possibility 2: $800,000 with a .5 probability
- Possibility 3: $500,000 with a .3 probability
Determine:
|
Leverage (Debt to Assets)
|
Interest Rate
|
Shares of Stock Outstanding
|
|
20%
|
6%
|
300,000
|
|
50%
|
10%
|
200,000
|
Earnings per Share?
Standard Deviation?
Coefficient of Variation?