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Home​ Depot, Inc.​ (HD), had 1244 million shares of common stock outstanding in​ 2016, whereas Lowes​...

Home​ Depot, Inc.​ (HD), had 1244 million shares of common stock outstanding in​ 2016, whereas Lowes​ Companies, Inc.​ (LOW), had 929 million shares outstanding. Assuming Home​ Depot's 2016 interest expense is $919 ​million, Lowes' interest expense is​ $552 ​million, and a 34 percent tax rate for both​ firms, what is their​ break-even level of operating income​ (i.e., the level of EBIT where EPS is the same for both​ firms)?

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Answer #1

break-even level of operating income is teh point where EPS of two firm is equal.

So,

EPS for Home Depot = [(EBIT - $919) × (1 - 34%)] / 1,244

Again,

EPS for Lowes = [(EBIT - $552) × (1 - 34%)] / 929

Now, Equate both EPS

[(EBIT - $919) × (1 - 34%)] / 1,244 = [(EBIT - $552) × (1 - 34%)] / 929

(EBIT - $919) / 1,244 = (EBIT - $552) / 929

(EBIT - $552) / (EBIT - $919) = 1,244 / 929

(EBIT - $552) = 1.33 × (EBIT - $919)

EBIT - $552 = 1.33EBIT - $1,230.61

0.33EBIT = $678.61

EBIT = $2,056.39 million.

break-even level of operating income is $2,056.39.

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