Question

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.)
  

Answer 1

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)