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12. Lenows Drug Stores and Halls Pharmaceuticals are competitors in the discount drug chain store business. The separate capital structures for Lenow and Hall are presented here.

Lenow				Hall
Debt @ 10%	$	140,000		Debt @ 10%	$	280,000
Common stock, $10 par		280,000		Common stock, $10 par		140,000
Total	$	420,000		Total	$	420,000
Common shares		28,000		Common shares		14,000

a. Complete the following table given earnings before interest and taxes of $18,000, $42,000, and $59,000. Assume the tax rate is 30 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? $18,000 $420,000 % $42,000 $420,000 % $59,000 $420,000 %

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.

	EPS is unaffected by financial leverage when the pre-tax return on assets (EBIT/TA) the cost of debt.

c. 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?

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