Chapter 2: 16BP_a (page 149)

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

Expert verified

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

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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

Short Answer

Step by step solution

Calculation of earning per share of Lenow

Calculation of earning per share 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