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Lenows Drug Stores and Halls Pharmaceuticals are competitors in the discount drug chain store business....

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Finance

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%
$ 290,000
Debt @ 10%
$ 580,000
Common stock, $10 par 580,000 Common stock, $10 par 290,000
Total
$ 870,000
Total
$ 870,000
Common shares
58,000
Common shares
29,000

a. Complete the following table given earnings before interest and taxes of $33,000, $87,000, and $88,000. 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 relation ship between
EBIT Total Assets EBIT/TA % Lenow EPS Hall EPS The EPS of the two firms
$33,000 $870,000 3.79 %
$87,000 $870,000 10.00 %
$88,000 $870,000 10.11 %

b-1. What is the EBIT/TA rate when the firm's have equal EPS? EBIT/TA rate ____%

b-2. What is the cost of debt? 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? Break even level _____

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