Lever
Brothers has a debt ratio (debt to assets) of 20%. Management is
wondering if its current capital structure is too conservative. Lever
Brothers’s present EBIT is $3 million, and profits available to common
shareholders are $1,680,000, with 457,143 shares of common stock
outstanding. If the firm were to instead have a debt ratio of 40%,
additional interest expense would cause profits available to
stockholders to decline to $1,560,000, but only 342,857 common shares
would be outstanding. What is the difference in EPS at a debt ratio of
40% versus 20%?
A. $1.95
B. $1.16
C. $0.88
D. $2.12
A. $1.95
B. $1.16
C. $0.88
D. $2.12
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