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

b. Explain the relationship between earnings per share and the level of EBIT.

Short answer

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.