Lenows Drug Stores and Halls Pharmaceuticals are competitors in the discount drug chain store business. The separate capital structures for Lenow and Hall are presented next.

Lenow		Hall
Debt @ 8%	$	240,000		Debt @ 8%	$	480,000
Common stock, $10 par		480,000		Common stock, $10 par		240,000
Total	$	720,000		Total	$	720,000
Common shares		48,000		Common shares		24,000

a.

Complete the following table given earnings before interest and taxes of $28,000, $57,600, and $72,000. Assume the tax rate is 10 percent. (Leave no cells blank - be certain to enter "0" wherever required. Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places.)

EBIT	Total assets	EBIT/TA	Lenow EPS	Hall EPS	What is the relationship between the EPS of the two firms?
$ 28,000	$720,000	%	$	$

$ 57,600	$720,000	%	$	$

$72,000	$720,000	%	$	$

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 10 percent and all other factors remained equal, what would be the break-even level for EBIT?

Break-even level

$