Question: Daddi Mac, Inc., doesn’t face any
Daddi Mac, Inc., doesn’t face any taxes and has $350 million in assets, currently financed entirely with equity. equity is worth $37 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 are dependent upon which state of the economy occurs this year, with the possible values of EBIT and their associated probabilities shown as follows:
The firm is considering switching to a 20 percent debt capital structure, and has determined that they would have to pay an 8 percent yield on perpetual debt regardless of whether they change their capital structure. What will be the standard deviation in EPS if they switch to the proposed capital structure?
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STATE Probability of state RECESSION AVERAGE BOOM 0.55 0.25 0.20 Expected EBIT in state $5 million s10 million S17 million
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> What’s the source of firm-specific risk? What’s the source of market risk?
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> What is the difference between time series analysis and cross-sectional analysis?
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