Comet and Asteroid are competitors in the scientific toy industry. Comet has been manufacturing educational toys...

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Comet and Asteroid are competitors in the scientific toy industry. Comet has been manufacturing educational toys for the last 50 years, and been through many economic cycles. As a result, Comet management is regarded as conservative with respect to leverage. Management knows how difficult business gets when consumer spending slows. Their main competitor, Asteroid, on the other hand, is a new entrant to the toy market and has grown sales rapidly mainly through acquiring smaller companies. As a result of this acquisition strategy, Asteroid has acquired a lot more debt over the last few years. Below are the capital structures of the two toy companies: Debt @ 9% Common Stock TOTAL Common Shares EBIT Interest EBT Taxes EAT Comet Questions: a) Compute EPS for both companies, if EBIT are $44,000, $59,400, and $67,000 (assume a 20% tax rate). Use the template below. b) Discuss the relationship between EPS and the level of EBIT, with respect to the cost of debt. Explain when Comet would outperform Asteroid, and when Asteroid would outperform Comet. TEMPLATE for part A - must be completed for each EBIT level Comet Shares EPS $220,000 440,000 660,000 44,000 Debt @ 9% Common Stock TOTAL Asteroid $440,000 220,000 660,000 22,000 Asteroid Comet and Asteroid are competitors in the scientific toy industry. Comet has been manufacturing educational toys for the last 50 years, and been through many economic cycles. As a result, Comet management is regarded as conservative with respect to leverage. Management knows how difficult business gets when consumer spending slows. Their main competitor, Asteroid, on the other hand, is a new entrant to the toy market and has grown sales rapidly mainly through acquiring smaller companies. As a result of this acquisition strategy, Asteroid has acquired a lot more debt over the last few years. Below are the capital structures of the two toy companies: Debt @ 9% Common Stock TOTAL Common Shares EBIT Interest EBT Taxes EAT Comet Questions: a) Compute EPS for both companies, if EBIT are $44,000, $59,400, and $67,000 (assume a 20% tax rate). Use the template below. b) Discuss the relationship between EPS and the level of EBIT, with respect to the cost of debt. Explain when Comet would outperform Asteroid, and when Asteroid would outperform Comet. TEMPLATE for part A - must be completed for each EBIT level Comet Shares EPS $220,000 440,000 660,000 44,000 Debt @ 9% Common Stock TOTAL Asteroid $440,000 220,000 660,000 22,000 Asteroid

Answer rating: 100% (QA)

a Compute EPS for both companies if EBIT is 44000 59400 and 67000 assume a 20 tax rate EBIT 44000 Comet Interest Debt Interest Rate 220000 9 19800 EBT ... View the full answer