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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

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 @ 10% $ 260,000 Debt @ 10% $ 520,000
Common stock, $10 par 520,000 Common stock, $10 par 260,000
Total $ 780,000 Total $ 780,000
Common shares 52,000 Common shares 26,000

a.

Complete the following table given earnings before interest and taxes of $30,000, $78,000, and $80,000. Assume the tax rate is 30 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?

$ 30,000 $780,000 % $ $ (Click to select)Lenow's EPS > Hall's EPSLenow's EPS = Hall's EPSLenow's EPS < Hall's EPS
$ 78,000 $780,000 % $ $ (Click to select)Lenow's EPS > Hall's EPSLenow's EPS = Hall's EPSLenow's EPS < Hall's EPS
$80,000 $780,000 % $ $ (Click to select)Lenow's EPS > Hall's EPSLenow's EPS = Hall's EPSLenow's EPS < Hall's EPS

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) (Click to select)equalsexceedsis less than 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 $

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