Lever Brothers has a debt ratio (debt to assets) of 40%. - 911

Solution Posted by
Solution Detail
Price: $1.25
  • From: ,
  • Posted on: Tue 06 Mar, 2012
  • Request id: None
  • Purchased: 0 time(s)
  • Average Rating: No rating
Request Description

Lever Brothers has a debt ratio (debt to assets) of 40%. 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 $1,560,000, with 342,857 shares of common stock outstanding. If the firm were to instead have a debt ratio of 60%, additional interest expense would cause profits available to stockholders to decline to $1,440,000, but only 228,571 common shares would be outstanding. What is the difference in EPS at a debt ratio of 60% versus 40%? 

A.$2.00

B.$3.25

C.$1.75

D.$4.50

Solution Description

Lever Brothers has a debt ratio (debt to assets) of 40%. Management is wondering if its current capital structure is too conservative. Le