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 in the attached file.
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?
See the attached file for complete solution. The text here may not be copied exactly as some of the symbols/tables may not print. Thanks.
EBIT 10000 EBIT 10000
Interest 5000 (50000*0.1) Interest 10000 (100000*0.1)
EBT 5000 EBT 0
Tax @30% 1500 Tax @ 30% 0
EAT 3500 EAT 0
No of shares 10000 No of shares 5000
EPS $0.35 (3500/10000) EPS 0 (0/5000)
This post explains how to calculate the earnings per share and break even level of EBIT.