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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