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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 @ 8%	$	120,000		Debt @ 10%	$	240,000
Common stock, $10 par		240,000		Common stock, $10 par		120,000
Total	$	360,000		Total	$	360,000
Common shares		24,000		Common shares		12,000

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.) EBIT Total Assets EBIT/TA Lenow EPS Hall EPS the EPS of the two firms?

$16,000 $360,000, ______ % ________ _______ ______________

$28,800 $360,000, 8.00% ________ _______________

$79,000 $360,000, ______ % _________ _________ _______________

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 %

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?

Break-even level

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