Question:
In Problem 1, compute the stock price for Cain if it sells at 18 times earnings per share and EBIT is $40,000.
Problem 1: Cain Auto Supplies and Able Auto Parts are competitors in the aftermarket for auto supplies. The separate capital structures for Cain and Able are presented below.
cain able
Debt 10% 50,000 Debt 10% 100,000
Common stock,$10 per 100,000 Common stock,$10 per 50,000
Total 150,000 Total 150,000
Common shares 10,000 common shares 5,000
a. Compute earnings per share if earnings before interest and taxes are $10,000, $15,000, and $50,000 (assume a 30 percent tax rate).
b. Explain 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?