Problem 5-1 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 Debt @ 9% Common stock $130.000 260,000 Debt @ 9% Common stock $260,000 130,000 $390,000 13,000 Total $390,000 Total Common shares 26,000 Common shares a. Compute EPS if EBIT are $26,000, $35,100, and $58,000 (assume a 20 percent tax rate). (Round the final answers to 2 decimal places. Do not leave any empty spaces; input a 0 wherever it is required.) Able EPS at $26,000 EPS at $35,100 EPS at $58,000 b. What is the relationship between EPS and level of EBIT? 1. Eamings before interest and taxes is less than cost of Debt. 2. Eamings before interest and taxes equals cost of Debt 3. Eamings before interest and taxes is greater than cost of Debt. Able does better Cain does better Both are at equilibrium If the cost of debt went up to 11 percent and all other factors remained equal, what would be the indifference point for EBIT? reak-even level 26