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EBIT-EPS analysis

Leno Drug Store and Hall Drug store are competitors in the discount drug chain business. Two separate capital structures.
Leno
Debt @ 10% $100,000
Common Stock, $10 par $200,000
Total $300,000
Shares 20,000

Hall
Debt @ 10% $200,000
Common Stock, $10 par $100,000
Total $300,000
Shares 10,000

Requirements: Show step-by-step and correct calculation with the formulas for the following.
a. Compute earnings per share if earning before interest and taxes are $20,000, $30,000 and $120,000
b. Explain the relationship between earnings per share and the level of EBIT.
c. If the cost of debt went up to 12% and all other facts remained equal, what would be the break-even level for EBIT?

Required: Show step-by-step and correct calculation with the formulas.

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Solution Summary

Calculates EPS at different EBIT levels. Calculates the break-even level for EBIT.

$2.19