Question
In: Finance
Lenow Drug Stores and Hall Pharmaceuticals are competitors in the discount drug chain store business. The...
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 | Hall | |||||
| Debt @ 8% | $ | 120,000 | Debt @ 8% | $ | 240,000 | |
| Common stock, $10 par | 240,000 | Common stock, $10 par | 120,000 | |||
| Total | $ | 360,000 | Total | $ | 360,000 | |
| Common shares | 24,000 | Common shares | 12,000 | |||
Complete the following table given earnings before interest and
taxes of $16,000, $28,800, and $57,000. Assume the tax rate is 10
percent. (Negative amounts should be indicated by
parentheses or a minus sign. Round your answers to
2 decimal places.)
| What is the relationship | ||||||
| EBIT | Total Assets | EBIT/TA | % | Lenow EPS | Hall EPS | of the two firms |
| $16,000 | $360,000 | |||||
| $28,800 | $360,000 | |||||
| $57,000 | $360,000 |
b. What is the EBIT/TA rate when the firm's have equal EPS?
b1. What is the cost of debt?
b2. State the relationship between earnings per share and the level of EBIT.
c. If the cost of debt went up to 10 percent and all other
factors remained equal, what would be the break-even level for
EBIT?
Solutions
Expert Solution
1.
| Lenow | Hull | |
| EBIT | 16000 | 16000 |
| Less:Interest | =120000*8% | =240000*8% |
| EBT | =16000-9600 | =16000-19200 |
| Less: Taxes@10% | =6400*0.9 | 0 |
| EAT | =6400-5760 | =-3200-0 |
| Shares | 24000 | 12000 |
| EPS | =640/24000 | =-3200/12000 |
| EBIT/TA | =16000/360000 | =16000/360000 |
| EBIT | 28800 | 28800 |
| Less:Interest | =120000*10% | =240000*10% |
| EBT | =28800-9600 | =28800-19200 |
| Less: Taxes@10% | =19200*0.9 | =9600*0.9 |
| EAT | =19200-17280 | =9600-8640 |
| Shares | 24000 | 12000 |
| EBIT/TA | =28800/360000 | =28800/360000 |
| EPS | =1920/24000 | =960/12000 |
| EBIT | 57000 | 57000 |
| Less:Interest | =120000*8% | =240000*8% |
| EBT | =57000-9600 | =57000-19200 |
| Less: Taxes@10% | =47400*0.9 | =37800*0.9 |
| EAT | =47400-42660 | =37800-34020 |
| Shares | 24000 | 12000 |
| EPS | =4740/24000 | =3780/12000 |
| EBIT/TA | =57000/360000 | =57000/360000 |
| Lenow | Hull | |
| EBIT | 16000 | 16000 |
| Less:Interest | 9600 | 19200 |
| EBT | 6400 | -3200 |
| Less: Taxes@10% | 5760 | 0 |
| EAT | 640 | -3200 |
| Shares | 24000 | 12000 |
| EPS | 0.02666667 | -0.26666667 |
| EBIT/TA | 0.04444444 | 0.044444444 |
| EBIT | 28800 | 28800 |
| Less:Interest | 12000 | 24000 |
| EBT | 19200 | 9600 |
| Less: Taxes@10% | 17280 | 8640 |
| EAT | 1920 | 960 |
| Shares | 24000 | 12000 |
| EBIT/TA | 0.08 | 0.08 |
| EPS | 0.08 | 0.08 |
| EBIT | 57000 | 57000 |
| Less:Interest | 9600 | 19200 |
| EBT | 47400 | 37800 |
| Less: Taxes@10% | 42660 | 34020 |
| EAT | 4740 | 3780 |
| Shares | 24000 | 12000 |
| EPS | 0.1975 | 0.315 |
| EBIT/TA | 0.15833333 | 0.158333333 |
B1))
| Lenow | Hull | |
| Cost of Debt (Pre Tax) | =8% | =8% |
| Cost of Debt (After Tax) | =8%*0.9 | =8%*0.9 |
| Lenow | Hull | |
| Cost of Debt (Pre Tax) | 8.000% | 8.000% |
| Cost of Debt (After Tax) | 7.200% | 7.200% |
B2))As EBIT Increates EPS increases for both firms, but more for Hull as it has less number of shares, Outstanding.
jeff jeffy answered 2 years agoRelated Solutions
Lenow Drug Stores and Hall Pharmaceuticals are competitors in the discount drug chain store business. The...
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
Hall
Debt @ 10%
$
140,000
Debt @ 10%
$
280,000
Common stock, $10 par
280,000
Common stock, $10 par
140,000
Total
$
420,000
Total
$
420,000
Common shares
28,000
Common shares
14,000
a. Complete the following table given earnings
before interest and taxes of $18,000, $42,000, and $59,000. Assume
the tax rate...
Lenow Drug Stores and Hall Pharmaceuticals are competitors in the discount drug chain store business. The...
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
Hall
Debt @ 9%
$
70,000
Debt @ 9%
$
140,000
Common stock, $10 par
140,000
Common stock, $10 par
70,000
Total
$
210,000
Total
$
210,000
Common shares
14,000
Common shares
7,000
a. Complete the following table given earnings
before interest and taxes of $12,000, $18,900, and $52,000. Assume
the tax rate...
Lenow’s Drug Stores and Hall’s Pharmaceuticals are competitors in the discount drug chain store business. The...
Lenow’s Drug Stores and Hall’s Pharmaceuticals are competitors
in the discount drug chain store business. The separate capital
structures for Lenow and Hall are presented here. Lenow Hall Debt @
9% $ 190,000 Debt @ 9% $ 380,000 Common stock, $10 par 380,000
Common stock, $10 par 190,000 Total $ 570,000 Total $ 570,000
Common shares 38,000 Common shares 19,000
a. Complete the following table given earnings before interest
and taxes of $23,000, $51,300, and $64,000. Assume the tax rate...
Lenow’s Drug Stores and Hall’s Pharmaceuticals are competitors in the discount drug chain store business. The...
Lenow’s Drug Stores and Hall’s Pharmaceuticals are competitors
in the discount drug chain store business. The separate capital
structures for Lenow and Hall are presented here.
Lenow
Hall
Debt @ 9%
$
130,000
Debt @ 9%
$
260,000
Common stock, $10 par
260,000
Common stock, $10 par
130,000
Total
$
390,000
Total
$
390,000
Common shares
26,000
Common shares
13,000
a. Complete the following table given earnings
before interest and taxes of $17,000, $35,100, and $58,000. Assume
the tax rate...
Lenow’s Drug Stores and Hall’s Pharmaceuticals are competitors in the discount drug chain store business. The...
Lenow’s Drug Stores and Hall’s Pharmaceuticals are competitors
in the discount drug chain store business. The separate capital
structures for Lenow and Hall are presented here.
Lenow
Hall
Debt @ 10%
$
100,000
Debt @ 10%
$
200,000
Common stock, $10 par
200,000
Common stock, $10 par
100,000
Total
$
300,000
Total
$
300,000
Common shares
20,000
Common shares
10,000
a. Complete the following table given earnings
before interest and taxes of $20,000, $30,000, and $120,000. Assume
the tax rate...
Lenow’s Drug Stores and Hall’s Pharmaceuticals are competitors in the discount drug chain store business. The...
Lenow’s Drug Stores and Hall’s Pharmaceuticals are competitors
in the discount drug chain store business. The separate capital
structures for Lenow and Hall are presented here.
Lenow
Hall
Debt @ 9%
$
160,000
Debt @ 9%
$
320,000
Common stock, $10 par
320,000
Common stock, $10 par
160,000
Total
$
480,000
Total
$
480,000
Common shares
32,000
Common shares
16,000
a. Complete the following table given earnings
before interest and taxes of $20,000, $43,200, and $61,000. Assume
the tax rate...
Lenow’s Drug Stores and Hall’s Pharmaceuticals are competitors in the discount drug chain store business. The...
Lenow’s Drug Stores and Hall’s Pharmaceuticals are competitors
in the discount drug chain store business. The separate capital
structures for Lenow and Hall are presented here.
Lenow
Hall
Debt @ 8%
$
300,000
Debt @ 8%
$
600,000
Common stock, $10 par
600,000
Common stock, $10 par
300,000
Total
$
900,000
Total
$
900,000
Common shares
60,000
Common shares
30,000
a. Complete the following table given earnings
before interest and taxes of $34,000, $72,000, and $89,000. Assume
the tax rate...
Lenow’s Drug Stores and Hall’s Pharmaceuticals are competitors in the discount drug chain store business. The...
Lenow’s Drug Stores and Hall’s Pharmaceuticals are competitors
in the discount drug chain store business. The separate capital
structures for Lenow and Hall are presented here.
Lenow
Hall
Debt @ 10%
$
110,000
Debt @ 10%
$
220,000
Common stock, $10 par
220,000
Common stock, $10 par
110,000
Total
$
330,000
Total
$
330,000
Common shares
22,000
Common shares
11,000
a. Complete the following table given earnings
before interest and taxes of $15,000, $33,000, and $56,000. Assume
the tax rate...
Grande Stores is a large discount catalog department store chain. The company has recently expanded from...
Grande Stores is a large discount catalog department store
chain. The company has recently expanded from six to 43 stores by
borrowing from several large financial institutions and from a
public offering of common stock. A recent investigation has
disclosed that Grande materially overstated net income. This was
accomplished by understating accounts payable and recording
fictitious supplier credits that further reduced accounts payable.
An SEC investigation was critical of the evidence gathered by
Grande’s audit firm, Montgomery & Ross, in...
The management of Discount Furniture, a chain of discount furniture stores in the Northeast, designed an...
The management of Discount Furniture, a chain of discount
furniture stores in the Northeast, designed an incentive plan for
salespeople. To evaluate this innovative plan, 14 salespeople were
selected at random, and their weekly incomes before and after the
plan were recorded. (use the six steps of hypothesis testing)
Salesperson
Before
After
1
580
615
2
562
636
3
618
633
4
611
627
5
600
687
6
603
698
7
563
665
8
584
599
9
564
678
10...
ADVERTISEMENT
ADVERTISEMENT
Latest Questions
- Kelson Sporting Equipment, Inc., makes two different types of baseball gloves: a regular model and a...
- Write in Python and as 2 seperate programs Write a program that allows the user to...
- Asymptotic Notation. (a) [10 pts.] Prove that n3 −91n2 −7n−14 = Ω(n3). Your answer must clearly...
- Prepare ONE Page reflection to the readings of the Perceptual Process incorporating as well one outside...
- How is the internet affecting our everyday life? I just need a rough draft for this...
- Please explain your view of the most difficult aspect of Customs Compliance?
- You are required to write an interactive program that prompts the user for seven (7) real...
ADVERTISEMENT