Lever Brothers has a debt ratio (debt to assets) of 40%. - 4530

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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. $3.25 

B. $1.75 

C. $2.00 

D. $4.50 

 
Solution Description

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