Question

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 @ 9% $ 70,000 Debt @ 9% $ 140,000 Common stock, $10 par 140,000 Common stock, $10 par 70,000 Total $ 210,000 Total $ 210,000 Common shares 14,000 Common shares 7,000 a. Complete the following table given earnings before interest and taxes of $12,000, $18,900, and $52,000. Assume the tax rate is 20 percent. (Negative amounts should be indicated by parentheses or a minus sign. Round your answers to 2 decimal places.) 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 11 percent and all other factors remained equal, what would be the break-even level for EBIT?

Answer 1

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

- 2x Σ AutoSum : A projects (Autosaved) (Autosaved) (Autosaved) - Microsoft Excel (Product Activation Failed) File Home Insert Page Layout Formulas Data Review View Add-Ins % Cut Calibri 11 A A = = = V Wrap Text General Ea Copy Paste B I U - D SF A Merge Merge & Center Center Format Painter $ - % % 4:0 .00 8.9 Conditional Format Cell Insert Delete Format Formatting as Table Styles Clipboard Font Alignment Number Styles Cells 1H400 - for HY HZ IA Formula Bar IB IC I D IE IF IG Fill Clear Sort & Filter Editing Find & Select TH 386 HALL 387 388 389 390 LENOW EBIT INTEREST 12000 6300 5700 1140 4560 ЕВТ 18900 6300 12600 2520 10080 52000 6300 45700 9140 36560 12000 12600 -600 18900 12600 6300 1260 5040 52000 12600 39400 7880 31520 391 -120 TAX NET INCOME -480 392 393 394 395 NO OF SHARES 14000 14000 14000 7000 7000 7000 396 EPS 0.33 0.72 2.61 -0.07 0.72 4.50 397 398 399 400 401 402 403 404 H REPLACEMENTS HPR GMAM EAC MACRS NPV RELEVANT BETA LEVERED REPLACEMENT BOND OPTION TO WAIT i nvest, EAA MI-np-ir_ ferences: C036 STEIN indiffEPS EBIT LEASE RATI BOJ 130% O O Red DO 4 * 410 ENG 30-10-2019

projects (Autosaved) (Autosaved) (Autosaved) - Microsoft Excel (Product Activation Failed) Data Review View Add-Ins File Home Insert Page Layout Formulas - 2x % Cut Σ AutoSum : A 11 A = = = V General A A Wrap Text Merge & Center * Autosum " Y $ - % 8.9 Insert Delete Format U - D Font Conditional Format Formatting as Table Styles Cell Styles Fill Clear Sort & Filter Editing Find & Select C Alignment Number Cells Calibri E Copy Paste Format Painter B I Clipboard IH385 HY HZ 367 368 IA IB IC ID I E IF 11 15 (a) EBIT TOTAL ASSETS EBIT/TA 12000 210000 5.71% 18900 210000 9.00% 52000 210000 24.76% 369 LENOW EPS 0.33 0.72 2.61 IG TH WHAT IS THE RELATIONSHIP BETWEEN THE EPS OF TWO FIRMS LENOW EPS > HALL EPS LENOW EPS = HALL EPS LENOW EPS <HALL EPS HALL EPS -0.07 0.72 4.50 370 371 372 373 374 375 376 SEE THE 1ST IMAGE, EPS IS EQUAL WHEN EBIT = 18900 EBIT/TA RATE 9.00% b-2 COST OF DEBT 9.00% 377 b-3 EPS IS UNAFFECTED BY FINANCIAL LEVERAGE WHEN THE PRE-TAX RETURN ON ASSETS(EBIT/TA) IS EQUAL TO THE COST OF DEBT COST OF DEBT = 11% 378 379 380 381 382 383 384 BREAKEVEN LEVEL EBIT = 11% OF TOTAL ASSETS = 10%*210000 BREAKEVEN LEVEL 23100 385 H REPLACEMENTS HPR GMAM EAC MACRS NPV RELEVANT BETA LEVERED REPLACEMENT BOND i nvest, EAA MI-np-ir_ ferences: C036 OPTION TO WAIT STEIN indiffEPS EBIT LEASE RATI BOJ 130% ELEB * 10 ENG O O Red 30-10-2019