Lenow Drug Stores and Hall Pharmaceuticals are competitors in the discount drug chain store business. The separate capital structures for Lenow and Hall are presented here.
Lenow | Hall | |||||
Debt @ 10% | $ | 170,000 | Debt @ 10% | $ | 340,000 | |
Common stock, $10 par | 340,000 | Common stock, $10 par | 170,000 | |||
Total | $ | 510,000 | Total | $ | 510,000 | |
Common shares | 34,000 | Common shares | 17,000 | |||
a.
Complete the following table given earnings before interest and
taxes of $21,000, $51,000, and $62,000. Assume the tax rate is 30
percent. (Negative amounts should be indicated by
parentheses or a minus sign. Round your answers to
2 decimal places.)
b-1. What is the EBIT/TA rate when the firm's have
equal EPS?
b-2. What is the cost of debt?
b-3. State the relationship between earnings per
share and the level of EBIT.
c. If the cost of debt went up to 12 percent and
all other factors remained equal, what would be the break-even
level for EBIT?
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