Foundations Of Financial Management

Stanley B. Block, Geoffrey A. Hirt, Bartley Danielsen

Business Studies

16th Edition 路 768 pages

ISBN: 9781259277160

Chapter 2: 16BP_b (page 149)

Lenow鈥檚 Drug Stores and Hall鈥檚 Pharmaceuticals are competitors in the discount drug chain store business. The separate capital structures for Lenow and Hall are presented here:
Lenow
Hall
Debt @ 10%
$100,000
Debt @ 10%
$200,000
Common stock, $10 par
200,000
Common stock, $10 par
100,000
Total
$300,000
Total
$300,000
Shares
20,000
Common shares
10,000
b. Explain the relationship between earnings per share and the level of EBIT.

Short Answer

Expert verified

There is direct relationship between the EPS and the level of EBIT. When the EBIT of company increases the EPS also increases. It is so because the income of the company increases but the number of shares are stable at all level.

Step by step solution

Relationship between the EPS and EBIT of Lenow

Earning before interest and taxes	$20,000	$30,000	$120,000
EPS	0.35	0.70	3.85

The EPS increases when the EBIT of the company increases. They are directly related to each other.

Relationship between the EPS and EBIT of Hall

Earning before interest and taxes	$20,000	$30,000	$120,000
EPS (EAT/No. of shares)	0	0.70	7

The EPS increases when the EBIT of the company increases. They are directly related to each other.

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Selling and administrative expenses	$112,000
Depreciation expenses	73,000
Sales	489,000
Interest expenses	45,000
Cost of goods sold	156,000
Taxes	47,000

Stud Clothier
Balance sheet 20X1
Assets		Liabilities and Equity
Cash	\)60,000	Account payable	\(220,000
Account receivable	240,000	Accrued taxes	30,000
Inventory	350,000	Bonds payable (long term)	150,000
Plant and equipment	410,000	Common stock	80,000
		Paid in capital	200,000
		Retained earnings	380,000
Total assets	\)1,060,000	Total LIbilities and Equity	$1,060,000

Times mirror and glass company
Sales	\(126,000
Less: Cost of goods sold	93,000
Gross profit	\)33,000
Less: selling and administrative expenses	11,000
Lease Expenses	4,000
Operating profit*	\(18,000
Less: Interest expenses	3,000
Earning before taxes	\)15,000
Less: Taxes (30%)	4,500
Earning after taxes	$10,500

Cash	\)163,000
Accounts receivable	889,000
Inventory	411,000
New plant and equipment	520,000
Total assets	$1,983,000

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Short Answer

Step by step solution

Relationship between the EPS and EBIT of Lenow

Relationship between the EPS and EBIT of Hall

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Lenow		Hall
Debt @ 10%	\(100,000	Debt @ 10%	\)200,000
Common stock, \(10 par	200,000	Common stock, \)10 par	100,000
Total	\(300,000	Total	\)300,000
Shares	20,000	Common shares	10,000