Copybold Corporation
Copybold Corporation is a start-up firm considering two alternative capital structures--one is conservative and the other aggressive.The conservative capital structure calls for a D/A ratio = 0.25, while the aggressive strategy call for D/A = 0.75.Once the firm selects its target capital structure it envisions two possible scenarios for its operations: Feast or Famine.The Feast scenario has a 60 percent probability of occurring and forecast EBIT in this state is R60,000.The Famine state has a 40 percent chance of occurring and the EBIT is expected to be R20,000.Further, if the firm selects the conservative capital structure its cost of debt will be 10 percent, while with the aggressive capital structure its debt cost will be 12 percent.The firm will have R400,000 in total assets, it will face a 40 percent marginal tax rate, and the book value of equity per share under either scenario is R10.00 per share.
-Refer to Copybold Corporation.What is the difference between the EPS forecasts for Feast and Famine under the aggressive capital structure?

Question

Quizplus · Accepted Answer

Under the aggressive capital structure, the difference in EPS between the Feast and Famine scenarios is R2.40. This is calculated by determining the EPS for each scenario and subtracting the Famine EPS from the Feast EPS.

Copybold Corporation Copybold Corporation Is a Start-Up Firm Considering Two Alternative Capital