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What is the cost of debt

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Question - Lenow Drug Stores and Hall Pharmaceuticals are competitors in the discount drug chain store business. The separate capital structures for Lenow and Hall are presented here.

Lenow HallDebt @ 10%$110,000 Debt @ 10%$220,000Common stock, $10 par 220,000 Common stock, $10 par 110,000Total$330,000 Total$330,000Common shares 22,000 Common shares 11,000

a. Complete the following table given earnings before interest and taxes of $15,000, $33,000, and $56,000. Assume the tax rate is 30 percent.

b-1. What is the EBIT/TA rate when the firm's have equal EPS?

b-2. What is the cost of debt?

b-3. State 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?

Reference no: EM132426743

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