Loving Gardens (LG) has $6 million in assets, $700,000 EBIT, 80,000 shares of stock outstanding, and a

Question:

Loving Gardens (LG) has $6 million in assets,

$700,000 EBIT, 80,000 shares of stock outstanding, and a marginal tax rate equal to 40 percent.

If LG’s debt-to-total-assets ratio (D/TA) is 70 percent, it pays 12 percent interest on debt, whereas if the D/TA ratio is 40 percent, interest is 9 percent. Calculate LG’s EPS and ROE (ROE 5 Net income/Equity) for each capital structure.

Which capital structure is better?

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