GTB, Inc., has a 25 percent tax rate and has $68.40 million in assets, currently financed entirely with equity.

GTB, Inc., has a 25 percent tax rate and has $68.40 million in assets, currently financed entirely with equity. Equity is worth $6 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 0.40   0.60    Expected EBIT in state $ 3,363,000  $ 15,675,000     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 level of expected EPS if GTB switches to the proposed capital structure?

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