Question

Lenow’s Drug Stores and Hall’s 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

a. Compute earnings per share if earnings before interest and taxes are \(20,000, \)30,000, and $120,000 (assume a 30 percent tax rate).

Short answer

The EPS of Lenow at EBIT $20,000, $30,000 and $120,000 is 0.35, 0.70 and 3.85 respectively. And, the EPS of Hall at EBIT $20,000, $30,000 anf $120,000 is 0, 0.70 and 7 respectively.

Step-by-step solution

Calculation of earning per share of Lenow

Earning before interest and taxes	$20,000	$30,000	$120,000
Less: Interest ($100,000 x 10%)	10,000	10,000	10,000
Earning before tax	$10,000	$20,000	$110,000
Tax @ 30%	3,000	6,000	33,000
Earning after tax	$7,000	$14,000	$77,000
Number of shares	20,000	20,000	20,000
EPS (EAT/No. of shares)	0.35	0.70	3.85

Calculation of earning per share of Hall

Earning before interest and taxes	$20,000	$30,000	$120,000
Less: Interest ($200,000 x 10%)	20,000	20,000	20,000
Earning before tax	$0	$10,000	$100,000
Tax @ 30%	0	3,000	30,000
Earning after tax	$0	$7,000	$70,000
Number of shares	10,000	10,000	10,000
EPS (EAT/No. of shares)	0	0.70	7