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Cain Auto Supplies and Able Auto Parts are competitors in the aftermarket for auto supplies. The separate capital structures for Cain and Able are presented below.

Cain		Able
Debt @ 8%		$120,000		Debt @ 8%		$240,000
Common stock		240,000		Common stock		120,000
Total		$360,000		Total		$360,000
Common shares		24,000		Common shares		12,000

a. Compute EPS if EBIT are $24,000, $28,800, and $57,000 (assume a 10 percent tax rate). (Round the final answers to 2 decimal places. Do not leave any empty spaces; input a 0 wherever it is required.)

	Cain	Able
EPS at $24,000	$	$
EPS at $28,800	$	$
EPS at $57,000	$	$

b. What is the relationship between EPS and level of EBIT?

1. Earnings before interest and taxes is less than cost of debt.	(Click to select) Cain does better Able does better Both are at equilibrium
2. Earnings before interest and taxes equals cost of debt.	(Click to select) Cain does better Both are at equilibrium Able does better
3. Earnings before interest and taxes is greater than cost of debt.	(Click to select) Both are at equilibrium Cain does better Able does better

c. If the cost of debt went up to 10 percent and all other factors remained equal, what would be the indifference point for EBIT?

Break-even level $

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