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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

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 @ 8% $ 300,000 Debt @ 8% $ 600,000
Common stock, $10 par 600,000 Common stock, $10 par 300,000
Total $ 900,000 Total $ 900,000
Common shares 60,000 Common shares 30,000

a. Complete the following table given earnings before interest and taxes of $34,000, $72,000, and $89,000. Assume the tax rate is 10 percent. (Negative amounts should be indicated by parentheses or a minus sign. Round your answers to 2 decimal places.)

What is the relationship between
EBIT Total Assets EBIT/TA % Lenow EPS Hall EPS the EPS of the two firms?
$34,000 $900,000 %
$72,000 $900,000 %
$89,000 $900,000 %

b-1. What is the EBIT/TA rate when the firm's have equal EPS?

b-2. What is the cost of debt?

b-3. State the relationship between earnings per share and the level of EBIT.

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?

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