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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 is 20 percent. (Negative amounts should be indicated by parentheses or a minus sign. Round your answers to 2 decimal places.)
  

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Expert Solution

Lenow’s Drug Stores and Hall’s Pharmaceuticals comparision
Lenow’s Drug Stores Hall’s Pharmaceuticals
EBIT $      20,000 $                43,200 $               61,000 $           20,000 $           43,200 $           61,000
Less: Interest $      14,400 $                14,400 $               14,400 $           28,800 $           28,800 $           28,800
EBT $        5,600 $                28,800 $               46,600 $            -8,800 $           14,400 $           32,200
Less: Tax $        1,120 $                  5,760 $                  9,320 $            -1,760 $              2,880 $              6,440
PAT $        4,480 $                23,040 $               37,280 $            -7,040 $           11,520 $           25,760
No of shares outstanding 32000 32000 32000 16000 16000 16000
EPS $          0.14 $                     0.72 $                    1.17 $              -0.44 $                0.72 $                1.61
Total Assets $ 4,80,000 $            4,80,000 $            4,80,000 $        4,80,000 $        4,80,000 $        4,80,000
(Debt + Common Stock)
EBIT/TA 4.17 9.00 12.71 4.17 9.00 12.71
(TA means Total Assets)

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