Cain Auto Supplies and Able Auto Parts are competitors in the aftermarket for auto supplies. The separate capital structures for Cain and Able are presented below.

a. Compute earnings per share if earnings before interest and taxes are $10,000, $15,000, and $50,000 (assume a 30 percent tax rate).
b. Explain the relationship between earnings per share and the level of EBIT.
c. If the cost of debt went up to 12 percent and all other factors remained equal, what would be the break-even level for EBIT?

Transcribed Image Text:

Cain Able Debt @ 10% $50,000 Debt@ 10% $100,000 50,000 Common stock, $10 par 00,000 Common stock, $10 par Total 150,000 Total 10,000 Common shares