Question

In: Finance

​(Using EBIT-EPS​ break-even analysis) Home​ Depot, Inc.​ (HD), had 1244 million shares of common stock outstanding...

​(Using EBIT-EPS​ break-even analysis) Home​ Depot, Inc.​ (HD), had 1244 million shares of common stock outstanding in​ 2016, whereas Lowes​ Companies, Inc.​ (LOW), had 929 million shares outstanding. Assuming Home​ Depot's 2016 interest expense is ​$919 ​million, Lowes' interest expense is ​$552 ​million, and a 35 percent tax rate for both​ firms, what is their​ break-even level of operating income​ (i.e., the level of EBIT where EPS is the same for both​ firms)?

The EBIT indifference level is ​$

nothing. ​(Round to the nearest​ dollar.)

Solutions

Expert Solution

Earning Per Share (EPS) is the ratio income available to shareholders and number of common share outstanding.

where,

t = tax rate

We have following information in the question -

Home Depot Inc. Lowes Companies Inc.
No. of outstanding share 1,244 millions 929 millions
Interest expenses $ 919 millions $ 552 millions
Tax rate 0.35 0.35

Let's Assume Indifference EBIT level for same EPS of both companies is $ X

We calculate the value X with following expression -

Thus, For same EPS of both companies, EBIT must be - $ 530,358,730

Please refer to below plot for better understanding -


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