Reference no: EM132967209

Two capital goods manufacturing companies, Rock Island and Davenport, are virtually identical in all aspects of their operations-product lines, amount of sales, total size, and so on.

The two companies differ only in their capital structures, as shown here:

                               Rock Island (millions)                Davenport (millions)

Debt (7%)                      $300                                   $600

Common equity                  $700                                   $400

Number of common shares outstanding  140                           80

• Each company has $1,000 billion in total assets.
• Capital goods manufacturers typically are subject to cyclical trends in the economy. Suppose that the EBIT level for both companies is $110 million during an expansion and $80 million during a recession. (Assume a 40% tax rate for both companies.)

Problem 1: Calculate the earnings per share for both companies during expansion and recession.