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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

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.

CainDebt @ 9%$100,000Common Stock200,000Total$300,000Common Shares20,000

AbleDebt @ 9%$200,000Common Stock100,000

Total$300,000Common shares10,000

a.Compute EPS if EBIT are $20,000, $27,000, and $55,000 (assume a 20 percent tax rate).(Round the final answers to 2 decimal places. Do not leave any empty spaces; input a 0 wherever it is required.)

CainAbleEPS at $20,000$$EPS at $27,000$$EPS at $55,000$$

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)

Able does better

Cain does better

Both are at equilibrium

2.Earnings before interest and taxes equals cost of debt.

(Click to select)

Cain does better

Able does better

Both are at equilibrium

3.Earnings before interest and taxes is greater than cost of debt.

(Click to select)

Cain does better

Able does better

Both are at equilibrium

c.If the cost of debt went up to 11 percent and all other factors remained equal, what would be the indifference point for EBIT?

Break-even level$

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