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QUESTION 4 10 points Save Answer Cobalt and Argon are competitors in the scientific toy industry. Cobalt has been manufacturing educational toys for the last
QUESTION 4 10 points Save Answer Cobalt and Argon are competitors in the scientific toy industry. Cobalt has been manufacturing educational toys for the last 50 years, and been through many economic cycles. As a result, Cobalt management is regarded as conservative with respect to leverage. Management knows how difficult business gets when consumer spending slows. Their main competitor, Argon, on the other hand, is a new entrant to the toy market and has grown sales rapidly mainly through acquiring smaller companies. As a result of this acquisition strategy, Argon has acquired a lot more debt over the last few years. Below are the capital structures of the two toy companies: Cobalt Argon Debt @8% $240,000 Debt @8% $480,000 Common Stock 480.000 Common Stock 240,000 TOTAL 720,000 TOTAL 720,000 Common Shares 48.000 24,000 Questions: a) Compute EPS for both companies, if EBIT are $48,000, 557,600, and $69,000 (assume a 10% tax rate). Use the template below. b) Discuss the relationship between EPS and the level of EBIT, with respect to the cost of debt. Explain when Cobalt would outperform Argon, and when Argon would outperform Cobalt. c) If the cost of debt increased to 10%, and all other factors remained constant, what would be the indifference point for EBIT? TEMPLATE for part A - must be completed for each EBIT level Cobalt Argon EBIT Interest EBT Taxes EAT Shares EPS For the toolbar, press ALT+F10 (PC) or ALT+FN+F10 (Mac)
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