Babbit Corp Has a Debt Ratio (Debt to Assets) of 40

Babbit Corp has a debt ratio (debt to assets) of 40%. Management is wondering if its current capital structure is too conservative. Babbit Corp's present EBIT is $4.5 million, and profits available to common shareholders are $2,851,200, with 480,000 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 $2,791,800, but only 384,000 common shares would be outstanding. What is the difference in EPS at a debt ratio of 60% versus 40%?

A) $5.94
B) $1.33
C) $1.09
D) $-0.12

Correct Answer:

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