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

question 30

Multiple Choice

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

---

Definitions:

FIFO

An inventory valuation method standing for "First-In, First-Out," where goods purchased or produced first are sold or used first.

Gross Profit

The difference between sales revenue and the cost of goods sold before administrative and other expenses are deducted.

Periodic Inventory System

An inventory accounting system where updates to the inventory account are made at specified intervals, not on a continuous basis.

After-Tax Income

The net income remaining after all tax obligations have been satisfied.