Question: Cain Auto Supplies and Able Auto Parts are competitors in the aftermarket for auto supplies. The seperate capital structures for Cain and Able are presented below:
Cain
Debt @10%...............$50,000
Common Stock, $10 par.....100,000
Total................................$150,000
Common Shares............... 10,000
ABLE
Debt @ 10%......................$100,000
Common stock, $10 par...... 50,000
Total.................................$150,000
Common Shares............... 5,000
a) How do I compare earnings per share if earnings before interest and taxes are $10,000, $15,000, and $50,000 (assume a 30 percent tax rate).
b) How do I explain the relationship between earnings per share and the lebel of EBIT?
c) How do i explain the following: 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?