GTB, Inc. has a 25 percent tax rate and has $85,536,000 in assets, currently financed entirely...

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GTB, Inc. has a 25 percent tax rate and has $85,536,000 inassets, currently financed entirely with equity. Equity is worth $6per share, and book value of equity is equal to market value ofequity. Also, let’s assume that the firm’s expected values for EBITdepend upon which state of the economy occurs this year, with thepossible values of EBIT and their associated probabilities as shownbelow:
State Pessimistic Optimistic
Probability ofstate 0.42 0.58
Expected EBIT instate $ 4.70 million $ 18.70 million
The firm is considering switching to a 25-percent-debt capitalstructure, and has determined that it would have to pay a 9 percentyield on perpetual debt in either event. What will be thebreak-even level of EBIT? (Enter your answer in dollars, not inmillions. Do not round intermediate calculations and round yourfinal answer to the nearest whole dollar amount.)

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3.6 Ratings (340 Votes)

Expected EBIT 47042187058 1282 million Break even level of EBIT is that EBIT level for which EPS is the same under both the alternatives capital See Answer

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GTB, Inc. has a 25 percent tax rate and has $85,536,000 inassets, currently financed entirely with equity. Equity is worth $6per share, and book value of equity is equal to market value ofequity. Also, let’s assume that the firm’s expected values for EBITdepend upon which state of the economy occurs this year, with thepossible values of EBIT and their associated probabilities as shownbelow:StatePessimisticOptimisticProbability ofstate0.420.58Expected EBIT instate$4.70million$18.70millionThe firm is considering switching to a 25-percent-debt capitalstructure, and has determined that it would have to pay a 9 percentyield on perpetual debt in either event. What will be thebreak-even level of EBIT? (Enter your answer in dollars, not inmillions. Do not round intermediate calculations and round yourfinal answer to the nearest whole dollar amount.)

State	Pessimistic			Optimistic
Probability ofstate		0.42			0.58
Expected EBIT instate	$	4.70	million	$	18.70	million