Cabot Corp has a debt ratio (debt to assets) of 60%. Management is wondering if its current capital structure is too conservative
Cabot Corp's present EBIT is $4.5 million, and profits available to common shareholders are $2,791,800, with 384,000 shares of common stock outstanding. If the firm were to instead have a debt ratio of 80%, additional interest expense would cause profits available to stockholders to decline to $2,732,400, but only 307,200 common shares would be outstanding. What is the difference in EPS at a debt ratio of 80% versus 60%?
A) $$1.62
B) $1.33
C) $7.27
D) $-0.15
Answer: A
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