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    I need help finding the answers to some problems, the class in Operating and Financial leverage.

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    Can you help me with this problem:

    Cain Auto Supplies and Able Auto Parts are competitors in the aftermarket for auto supplies. The seperate capital structures for Cain and Able are presented below:

    Cain
    Debt @10%...............$50,000
    Common Stock, $10 par.....100,000

    Total................................$150,000
    Common Shares............... 10,000

    ABLE
    Debt @ 10%......................$100,000
    Common stock, $10 par...... 50,000
    Total.................................$150,000
    Common Shares............... 5,000

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

    b) How do I explain the relationship between earnings per share and the lebel of EBIT?

    c) How do i explain the following: 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?

    I GREATLY appreciate your help, Thank you!!

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    Solution Preview

    a) How do I compare earnings per share if earnings before interest and taxes are $10,000, $15,000, and $50,000 (assume a 30 percent tax rate).
    EPS =(EBIT - I) (1-t) / n
    For Cain, Ic = 50,000*10% = 5,000
    And for ABLE, Ia = 100,000*10% = 10,000

    When EBIT= $10,000 for both,
    EPSc = (10,000 - 5000) (1-30%) / 10,000 = 0.35
    EPSa = (10,000 - 10000) (1-30%) / 5,000 = 0
    Then EPS of Cain > EPS of ABLE

    When EBIT= $15,000 for both, ...

    $2.19

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