Abbot Corp has a debt ratio (debt to assets)of 20%.Management is wondering if its current capital structure is too conservative.Abbot Corp's present EBIT is $4.5 million,and profits available to ordinary shareholders are $2,910,600,with 600,000 shares of ordinary shares outstanding.If the firm were to instead have a debt ratio of 40%,additional interest expense would cause profits available to shareholders to decline to $2,851,200,but only 480,000 ordinary shares would be outstanding.What is the difference in EPS at a debt ratio of 40% versus 20%?

Question

Quizplus · Accepted Answer

First, let's calculate the current EPS at a debt ratio of 20%:

Net Income available to ordinary shareholders = $2,910,600
Number of ordinary shares outstanding = 600,000

EPS = $2,910,600 / 600,000 = $4.85

Now, let's calculate the EPS at a debt ratio of 40%:

Net Income available to ordinary shareholders = $2,851,200
Number of ordinary shares outstanding = 480,000

EPS = $2,851,200 / 480,000 = $5.94

The difference in EPS is:

$5.94 - $4.85 = $1.09

Therefore, the answer is C) $1.09.

Abbot Corp Has a Debt Ratio (Debt to Assets)of 20