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