Eps

$ 1.00

$ 1.125

$ 0.91

If we assume that the price earnings ratio remains at 15, the price per share will change in proportion to the earnings per share. Realistically, however, we should expect to see a drop in the price earnings ratio, as the increase in debt makes the equity in the firm riskier. Whether the drop will be sufficient to offset or outweigh an increase in earnings per share will depend upon whether the firm has excess debt capacity and whether, by going to 20%, it is moving closer to its optimal debt ratio.

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