Problem 5-16 Earnings per share and financial leverage [LO4] Lenows Drug Stores and Halls Pharmaceuticals are competitors in the discount drug chain store business. The separate capital structures for Lenow and Hall are presented next.

Lenow Hall

Debt @ 9% $ 130,000 Debt @ 9% $ 260,000

Common stock, $10 par 260,000 Common stock, $10 par 130,000

Total $ 390,000 Total $ 390,000

Common shares 26,000 Common shares 13,000

a. Complete the following table given earnings before interest and taxes of $17,000, $35,100, and $58,000. Assume the tax rate is 20 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? $ 17,000 $390,000 % $ $

$ 35,100 $390,000 % $ $

$58,000 $390,000 % $ $

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 %

c. If the cost of debt went up 11 percent and all other factors remained equal, what would be the break-even level of EBIT?

Break even level $