Lenows Drug stores and Halls Pharmaceyticals are competitors in the discount drug chain store business. The separate capital structure for Lenow and Hall are presented below;
Lenow Hall
Debt@10% 100,000 Debt@10% 200,000
Common Stock !0 par 200,000 Common Stock 10 par 100,000
Total 300,000 Total 300,000
Common Shares 20,000 Common Share 10,000
a. Complete the following given earnings before interest and taxes of 20,000,30,000 and 120,000. Assume the tax rate is 30%. Leave nothing blank but enter zero whenever required. Round answer to 2 decimal places
EBIT Total Assets EBIT/TA Lenow EPS Hall EPS What is the relationship between EPS and the two firms
20,000 300,000
30,000 300,000
120,000 300,000
1. What is the EBIT/TA rate when the firms have equal EPS?
1.1 What is the cost of debt
2. State the relationship between earning per share and the level of EBIT
2.1 If the cost of the debt went up to 12% and all other factors remained equal, what will be the level for EBIT
2.2 Break Even Level