Task: 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 par . . . . . 100,000 Common stock, $10 par . . . . . . . . . 50,000
Total . . . . . . . . . . . . . . . . . . $150,000 Total . . . . . . . . . . . . . . . . . . . . . . . $150,000
Common shares . . . . . . . . . . 10,000 Common shares . . . . . . . . . . . . . . . 5,000
Q1. Compute earnings per share if earnings before interest and taxes are $10,000, $15,000, and $50,000 (assume a 30 percent tax rate).
Q2. Explain the relationship between earnings per share and the level of EBIT.
Q3. 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?