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    Harding Company leverage, break-even; Cain Auto & Able Auto EPS, EBIT, break-even

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    Problem #1. The Harding Company manufactures skates. The company's income statement for 2001 is as follows:

    HARDING COMPANY
    Income Statement For the Year Ended December 31, 2001

    Sales (10,000 skates @ $50 each) $500,000
    Less: Variable costs (10,000 skates at $20) 200,000
    Fixed costs 150,000
    Earnings before interest and taxes (EBIT) 150,000
    Interest expense 60,000
    Earnings before taxes (EBT) 90,000
    Income tax expense (40%) 36,000
    Earnings after taxes (EAT) 54,000

    Given this income statement, compute the following:

    a. Degree of operating leverage

    b. Degree of financial leverage

    c. Degree of combined leverage

    d. Break-even point in units (number of skates)

    Problem #2. 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 ABLE
    Debt @ 10% $ 50,000 Debt @ 10% $100,000
    Common stock, $10 par 100,000 Common stock, $10 par 50,000
    Total $150,000 Total $150,000
    Common shares 10,000 Common shares 5,000

    a. Compute earnings per share if earnings before interest and taxes are $10,000, $15,000, and $50,000 (assume a 30 percent tax rate)

    b. Explain the relationship between earnings per share and the level of EBIT

    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?

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    https://brainmass.com/business/accounting/harding-company-leverage-break-even-cain-auto-able-auto-eps-ebit-break-even-61373

    Solution Summary

    In an Excel format, the solutions for the two problems are clearly given complete with formulas, calculations and explanations.

    $2.19

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