Question
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
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% | $ | 60,000 | Debt @ 8% | $ | 120,000 | |
Common stock, $10 par | 120,000 | Common stock, $10 par | 60,000 | |||
Total | $ | 180,000 | Total | $ | 180,000 | |
Common shares | 12,000 | Common shares | 6,000 | |||
(a) | Compute earnings per share if earnings before interest and taxes are $12,000, $14,400, and $51,000 (assume a 10 percent tax rate). (Round your answers to 2 decimal places. Leave no cells blank - be certain to enter "0" wherever required. Omit the "$" sign in your response.) |
Cain | Able | |
Earnings per share at $12,000 | $ | $ |
Earnings per share at $14,400 | $ | $ |
Earnings per share at $51,000 | $ | $ |
(b) | What is the relationship between earnings per share and the level of EBIT? |
1. Before tax return on assets is less than cost of Debt | (Click to select)Cain does betterBoth are at equilibriumAble does better | |
2. Before tax return on assets equals cost of Debt | (Click to select)Able does betterBoth are at equilibriumCain does better | |
3. Before tax return on assets is greater than cost of Debt | (Click to select)Cain does betterBoth are at equilibriumAble does better | |
(c) | If the cost of debt went up to 10 percent and all other factors remained equal, what would be the break-even level for EBIT? (Omit the "$" sign in your response.) |
Break-even level | $ |
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