Question

enow Drug Stores and Hall Pharmaceuticals are competitors in the discount drug chain store business. The...

enow 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% $ 140,000 Debt @ 10% $ 280,000
Common stock, $10 par 280,000 Common stock, $10 par 140,000
Total $ 420,000 Total $ 420,000
Common shares 28,000 Common shares 14,000

a. Complete the following table given earnings before interest and taxes of $18,000, $42,000, and $59,000. 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.)


  

RELATIONSHIP OF THE 2 FIRMS EPS

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EBIT TOTAL ASSETS EBIT/TA % LENOW EPS HALL EPS
$18000 $420000
$42000 $420000
$59000 $420000


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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