Lenow Drug Stores and Hall 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%	$	110,000		Debt @ 10%	$	220,000
Common stock, $10 par		220,000		Common stock, $10 par		110,000
Total	$	330,000		Total	$	330,000
Common shares		22,000		Common shares		11,000

a. Complete the following table given earnings before interest and taxes of $15,000, $33,000, and $56,000. 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.)

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 _____________

Complete the following table given earnings before interest and taxes of $15,000, $33,000, and $5 te is 30 percent. (Negative amounts should be indicated by parentheses or a minus sign. Roundy ecimal places.) What is the relationship between the EPS of the two firms? EBIT/TA % Lenow EPS Hall EPS EBIT $ 15,000 $ 33,000 $ 56,000 Total Assets $ 330,000 $ 330,000 $ 330,000