b1 What is the EBITTA rate when the firms have equal EPS EBI

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

Solution

a) EBIT Total assets EBIT/TA Lenow EPS Hull EPS What is the relationship between the EPS of the two firms $      14,000 $   2,70,000 5.19% $             0.34 $        -0.04 Lenow EPS>Hull EPS $      21,600 $   2,70,000 8.00% $             0.72 $          0.72 The EPS of the two firms are equal $      54,000 $   2,70,000 20.00% $             2.34 $          3.96 Hull Eps>Lenow EPS WORKSHEET: LENOW: EBIT Interest EBT Tax NI $      14,000 $         7,200 $          6,800 $              680 $       6,120 $      21,600 $         7,200 $       14,400 $          1,440 $     12,960 $      54,000 $         7,200 $       46,800 $          4,680 $     42,120 HULL: EBIT Interest EBT Tax NI $      14,000 $       14,400 $            -400 $                 -   $         -400 $      21,600 $       14,400 $          7,200 $              720 $       6,480 $      54,000 $       14,400 $       39,600 $          3,960 $     35,640 b-1) EBIT/TA rate = 8.00% b-2) Cost of debt = 8*(1-0.10) = 7.20% b-3) EPS is unaffected by financial leverage when the pre-tax return on assets (EBIT/TA) equals cost of debt. c)) Break even level for EBIT = 270000*10% = $27,000.