Capital Structure Calculations
Please explain this problem to me:
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:
CAIN
Debt @ 10% $ 50,000
Common Stock, $10 par $100,000
Total $150,000
Common Shares 10,000
ABLE
Debt @ 10% $100,000
Common Stock, $10 par $ 50,000
Total $150,000
Common Shares 5,000
a. Compute earnings per share if earnings before interest and taxes are $10,000, $15,000, and $50,000 (assume a 30 percnt tax rate).
b. Explain the relationship betweem 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?
Please explain how to firgure this out. Thank you.
