Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

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% $150,000 Debt @ 8% $300,000
Common stock 300,000 Common stock 150,000
Total $450,000 Total $450,000
Common shares 30,000 Common shares 15,000

a. Compute EPS if EBIT are $30,000, $36,000, and $60,000 (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 $30,000 $ $
EPS at $36,000 $ $
EPS at $60,000 $ $

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 Both are at equilibrium Cain does better
2. Earnings before interest and taxes equals cost of debt. (Click to select) Able does better Both are at equilibrium Cain 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 $

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Finance For Executives Managing For Value Creation

Authors: Gabriel Hawawini, Claude Viallet

7th Edition

1473778913, 978-1473778917

More Books

Students also viewed these Finance questions

Question

What are official international reserves of the central bank?

Answered: 1 week ago

Question

Is your management system defined?

Answered: 1 week ago

Question

Do you have a comprehensive communication plan for your strategy?

Answered: 1 week ago

Question

Do you have sufficiently ambitious milestones?

Answered: 1 week ago