Compute earnings per share for both firms

Assignment Help Financial Management

Reference no: EM131995188

Sterling Optical and Royal Optical both make glass frames and each is able to generate earnings before interest and taxes of $136,000. The separate capital structures for Sterling and Royal are shown here:

Sterling Royal Debt @ 10% $ 816,000 Debt @ 10% $ 272,000 Common stock, $5 par 544,000 Common stock, $5 par 1,088,000 Total $ 1,360,000 Total $ 1,360,000 Common shares 108,800 Common shares 217,600

a. Compute earnings per share for both firms. Assume a 30 percent tax rate. (Round your answers to 2 decimal places.)

b. In part a, you should have gotten the same answer for both companies' earnings per share. Assuming a P/E ratio of 21 for each company, what would its stock price be? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

c. Now as part of your analysis, assume the P/E ratio would be 15 for the riskier company in terms of heavy debt utilization in the capital structure and 25 for the less risky company. What would the stock prices for the two firms be under these assumptions?

(Note: Although interest rates also would likely be different based on risk, we will hold them constant for ease of analysis.) (Do not round intermediate calculations. Round your answers to 2 decimal places.)

Reference no: EM131995188

Questions Cloud

How much should he set aside today for the purchase : Assume that Stephen can earn 3.69 percent (compounded monthly) on his money. How much should he set aside today for the purchase?

Calculate the amount of his theft loss deduction : Assuming that Steve had no insurance coverage on the bonsai and his adjusted gross income for the current year is $28,000.

Example of the types of immunities : What are the types of immunities and an example of the types of immunities?

Find all possible pathogen associated molecular patterns : Find all possible pathogen associated molecular patterns (PAMPs) and their respective sensors as a table

Compute earnings per share for both firms : Now as part of your analysis, assume the P/E ratio would be 15 for the riskier company in terms of heavy debt utilization in the capital structure .

The year-end balance in retained earnings for night scapes : Statement of Retained Earnings Night Scapes, Corp. began the year 2008 with $25 million in retained earnings.

Determination of the phenotypic colour : The fruit colours of summer squash may be white, yellow, or green. The determination of the phenotypic colour is an example of dominant epistasis.

What is the npv of project a at a discount rate of : Project b required equipment cost of $200000 and increases cash flow by $70000 per year in years 1-4. both projects have a 4 year life.

Reproductive independence from water : What reproductive problems did animals face during the transition from aquatic to terrestrial environments?

User Account

All Pages