Posted: March 26th, 2017

# Lever Brothers has a debt ratio (debt to assets) of 20%. Management is wondering if its current capital structure is too conservative

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

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