Lenow Drug Stores and Hall Pharmaceuticals are competitors in the discount drug chain store business. The separate capital structures for Lenow and Hall are presented here. Lenow Hall Debt @ 8% $ 210,000 Debt @ 8% $ 420,000 Common stock, $10 par 420,000 Common stock, $10 par 210,000 Total $ 630,000 Total $ 630,000 Common shares 42,000 Common shares 21,000 a. Complete the following table given earnings before interest and taxes of $25,000, $50,400, and $66,000. Assume the tax rate is 10 percent. (Negative amounts should be indicated by parentheses or a minus sign. Round your answers to 2 decimal places.) What is the relationship between EBIT Total Assets EBIT/TA % Lenow EPS Hall EPS the EPS of the two firms? $25,000 $630,000 % $50,400 $630,000 % $66,000 $630,000 % b-1. What is the EBIT/TA rate when the firm's have equal EPS? b-2. What is the cost of debt? b-3. State the relationship between earnings per share and the level of EBIT. c. If the cost of debt went up to 10 percent and all other factors remained equal, what would be the break-even level for EBIT?
Lenow Drug Stores and Hall Pharmaceuticals are competitors in the discount drug chain store business. The separate capital structures for Lenow and Hall are presented here.
| Lenow | Hall | |||||
| Debt @ 8% | $ | 210,000 | Debt @ 8% | $ | 420,000 | |
| Common stock, $10 par | 420,000 | Common stock, $10 par | 210,000 | |||
| Total | $ | 630,000 | Total | $ | 630,000 | |
| Common shares | 42,000 | Common shares | 21,000 | |||
a. Complete the following table given earnings before interest and taxes of $25,000, $50,400, and $66,000. Assume the tax rate is 10 percent. (Negative amounts should be indicated by parentheses or a minus sign. Round your answers to 2 decimal places.)
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b-1. What is the EBIT/TA rate when the firm's have equal EPS?
b-2. What is the cost of debt?
b-3. State the relationship between earnings per share and the level of EBIT.
c. If the cost of debt went up to 10 percent and all other factors remained equal, what would be the break-even level for EBIT?
EBIT or Earnings-Before Interest & Taxes refers to amount of profit that an entity earn before paying finance cost and taxes to government.
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