Loving Gardens (LG) has $5 million in assets, $400,000 EBIT, and a marginal tax rate equal to 40 percent. If LG's debt ratio (D/TA) is 20 percent, interest on its debt is 7 percent, whereas if the debt ratio is 40 percent, interest is 12 percent. LG will have 35,000 shares of stock outstanding if it is financed with 20 percent debt, but it will have 35,000 shares outstanding with 40 percent debt. Calculate LG's EPS and ROE (ROE = Net income/Equity) for each capital structure. Do not round intermediate calculations. Round your answers for EPS to the nearest cent and for ROE to two decimal places.

	20% debt		40% debt
EPS	$		$
ROE	%		%

Which capital structure is better?

The capital structure with -Select-20%40%Item 5 debt appears to be better.