Lever Brothers has a debt ratio (debt to assets) of 20%. Management is wondering

Question

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. $2.12
B. $1.95
C. $0.88
D. $1.16

Explanation / Answer

C. $0.88

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