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separate capital structures for Lenow and Hall are presented next.
| 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 is 10 percent. (Leave no cells blank – be certain to enter “0” wherever required. Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places.) |
| EBIT | Total assets | EBIT/TA | Lenow EPS | Hall EPS | What is the relationship between the EPS of the two firms? |
| $ 34,000 | $900,000 | % | $ | $ | (Click to select)Lenow’s EPS > Hall’s EPSLenow’s EPS = Hall’s EPSLenow’s EPS < Hall’s EPS |
| $ 72,000 | $900,000 | % | $ | $ | (Click to select)Lenow’s EPS > Hall’s EPSLenow’s EPS = Hall’s EPSLenow’s EPS < Hall’s EPS |
| $89,000 | $900,000 | % | $ | $ | (Click to select)Lenow’s EPS > Hall’s EPSLenow’s EPS = Hall’s EPSLenow’s EPS < Hall’s EPS |
| b-1. | What is the EBIT/TA rate when the firm’s have equal EPS? |
| EBIT/TA rate | % |
| b-2. | What is the cost of debt? |
| Cost of debt | % |
| b-3. | State the relationship between earnings per share and the level of EBIT. |
| EPS is unaffected by financial leverage when the pre-tax return on assets (EBIT/TA) (Click to select)equalsexceedsis less than the cost of debt. |
| 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? |
| Break-even level | $ |
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