Lenow\'s Drug are competitors in the discount drug chain store business. The sep

Question

Lenow's Drug are competitors in the discount drug chain store business. The separate capital structures for Lenow and Hall are presented here Debt @ 8% Common stock, $10 par Total Common shares $210000 Debt @ 8% $ 420,000 210,000 $630,000 21,000 420,000 Common stock, $10 par 630,000 Total 42,000 Common shares a complete the follo ng table given earnings before interest and taxes of S25,000 S50400, and S66,000. Assume the tax rate is 10 percent. Negative amounts should be indicated by? your answers to 2 decimal places What is the relationship between the EPS of the two firms? EBIT Total assets EBITTA?%ÍLenow EPS Hall EPS 25,000 $630.000 $50.400 $630,000 66,000$630,000 enow's EPS> Hals EPS enow's EPS Hal's EPS enows EFP b-1. What is the EBIT/TA rate when the firm's have equal EPS? MTAate

Explanation / Answer

Solution a:

Solution b1:

EBIT / TA rate when company is having equal EPS = $50,400 / $630,000 = 8%

Solution b2:

Cost of debt = Interest rate ( 1-Tax rate)

= 8% (1 - 0.10) = 7.20%

Solution b3:

EPS is unaffected by financial leverage when pre tax return on assets (EBIT / TA) is equal to pre tax cost of debt.

Note: I have answered first 4 parts of the question as per chegg policy, kindly post separate question for answer of remaining parts.

What is relationship between EBIT Total Assets EBIT / TA % Lenow EPS Hall EPS The EPS of the two firms $25,000.00 $630,000.00 3.97 % $0.18 -$0.37 Lenow EPS > Hall EPS $50,400.00 $630,000.00 8.00 % $0.72 $0.72 Lenow EPS = Hall EPS $66,000.00 $630,000.00 10.48 % $1.05 $1.39 Lenow EPS < Hall EPS

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