b-1 What is the EBIT/TA rate when the firm's have equal EPS? EBIT/TA rate b-2. What is the cost of debt? Cost of debt % b-3. State the relationship between earnings per share and the level of EBIT EPS is unaffected by financial leverage when the pre-tax return on assets (EBIT/TA) Break-even level the cost of debt 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?
b-1 What is the EBIT/TA rate when the firm's have equal EPS? EBIT/TA rate b-2. What is the cost of debt? Cost of debt % b-3. State the relationship between earnings per share and the level of EBIT EPS is unaffected by financial leverage when the pre-tax return on assets (EBIT/TA) Break-even level the cost of debt 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?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
Related questions
Question
33.
Subject :- Accounting
Transcribed Image Text:b-1 What is the EBIT/TA rate when the firm's have equal EPS?
EBIT/TA rate
b-2. What is the cost of debt?
Cost of debt
%
b-3. State the relationship between earnings per share and the level of EBIT
EPS is unaffected by financial leverage when the pre-tax return on assets (EBIT/TA)
c. If the cost of debt went up to 12 percent and all other factors remained i
Break-even level
the cost of debt
what would be the break-even level for EBIT?
Transcribed Image Text:Lenow Drug Stores and Hall Pharmaceuticals are competitors in the discount drug chain store business. The separate capital
structures for Lenow and Hall are presented here.
Lenow
Debt @ 10%
Common stock, $10 par
Total
Common shares
Total Assets
S 20,000 $ 300,000
S 30,000 $ 300,000
$ 120,000 $
300,000
$ 100,000
200,000
$ 300,000
20,000
EBIT
a. Complete the following table given earnings before interest and taxes of $20,000, $30,000, and $120,000. Assume the tax rate is
Note: Round your answers to 2 decimal places. Leave no cells blank be certain to enter O wherever required.
30 percent
Hall
Debt @ 10%
Common stock, $10 par
Total
Common shares
EBIT/TA% Lenow EPS
%
%
%
$ 200,000
100,000
$ 300,000
10,000
Hall EPS
What is the relationship between
the EPS of the two firms?
4
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 4 steps with 3 images
Recommended textbooks for you
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
Horngren's Cost Accounting: A Managerial Emphasis…
Accounting
ISBN:
9780134475585
Author:
Srikant M. Datar, Madhav V. Rajan
Publisher:
PEARSON
Intermediate Accounting
Accounting
ISBN:
9781259722660
Author:
J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher:
McGraw-Hill Education
Financial and Managerial Accounting
Accounting
ISBN:
9781259726705
Author:
John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles
Publisher:
McGraw-Hill Education