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Home Depot Inc had 1244 million shares of common stock outstanding in 2016 wheras Lowe's companies...

Home Depot Inc had 1244 million shares of common stock outstanding in 2016 wheras Lowe's companies Inc had 929 million shares outstanding.Assuming Home Depots 2016 interest expense is 919 million and Lowe's interest expense is 552 million and a 35 per went tax rate for both firm's. What is their break even level of operating income(i.e the level of EBIT where EPS is the same for both firm's?

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Answer #1

Let Breakeven EBIT be $x

Home Depot Inc:

Number of shares outstanding = 1,244 million
Interest expense = $919 million
Tax rate = 35%

EPS = (EBIT - Interest expense) * (1 - tax) / Number of shares outstanding
EPS = ($x - $919 million) * (1 - 0.35) / 1,244 million

Lowe’s Companies Inc:

Number of shares outstanding = 929 million
Interest expense = $552 million
Tax rate = 35%

EPS = (EBIT - Interest expense) * (1 - tax) / Number of shares outstanding
EPS = ($x - $552 million) * (1 - 0.35) / 929 million

EPS of Home Depot Inc = EPS of Lowe’s Companies Inc
($x - $919 million) * (1 - 0.35) / 1,244 million = ($x - $552 million) * (1 - 0.35) / 929 million
($x - $919 million) / 1,244 million = ($x - $552 million) / 929 million
929 * $x - $853,751 million = 1,244 * $x - $686,688 million
-$167,063 million = 315 * $x
$x = -$530.36 million

So, breakeven level of operating income is -$530.36 million

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