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

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!!

© BrainMass Inc. brainmass.com June 3, 2020, 5:35 pm ad1c9bdddfhttps://brainmass.com/business/finance/i-need-help-finding-the-answers-to-some-problems-the-class-in-operating-and-financial-leverage-31923

#### 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, ...