Compute earnings per share for both firms

Reference no: EM13296028

Sterling Optical and Royal Optical both make glass frames and each is able to generate earnings before interest and taxes of $97,600.

The separate capital structures for Sterling and Royal are shown below:

Sterling Royal
Debt @ 8% $ 732,000 Debt @ 8% $ 244,000
Common stock, $5 par 488,000 Common stock, $5 par 976,000

Total $ 1,220,000 Total $ 1,220,000
Common shares 97,600 Common shares 195,200

(a) Compute earnings per share for both firms. Assume a 25 percent tax rate. (Round your answers to 2 decimal places. Omit the "tiny_mce_markerquot; sign in your response.)

Earnings per share
Sterling $
Royal $

(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? (Use rounded Earnings per share. Round your answer to 2 decimal places. Omit the "tiny_mce_markerquot; sign in your response.)

Stock price $

(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 24 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.) (Use rounded Earnings per share. Round your answers to 2 decimal places. Omit the "tiny_mce_markerquot; sign in your response.)

Stock price
Sterling $
Royal $

Reference no: EM13296028

Questions Cloud

Successful at attracting and keeping purchasing customers : Successful at attracting and keeping purchasing customers

Major challenges you believe public policy analysts face : Discuss at least two major challenges you believe public policy analysts face in today’s political environment and propose at least one way to deal with each challenge.

Determine the maximum possible torque on the dipole : Two small plastic spheres, one charged to -25 nC and the other to +25 nC , are connected by a 28-mm-long insulating rod. What is the maximum possible torque on the dipole

First titration in part a and the second titration in part b : What is the main difference between the first titration in Part A and the second titration in Part B

Compute earnings per share for both firms : Compute earnings per share for both firms. Assume a 25 percent tax rate. (Round your answers to 2 decimal places. Omit the "tiny_mce_markerquot; sign in your response.)

Describe the features of a database management system : Describe the features of a Database Management System (DBMS) and its use within an organization.

Determine what is the content of the register after each shi : The content of a 4-bit register is initially 1111. The register is shifted eight times to the left, with the sequence 00101011 as the serial input. The leftmost bit of the sequence is applied first. What is the content of the register after each s..

Discuss at least two benefits to structuring arguments : Discuss at least two benefits to structuring arguments before and while developing written documents.

Compute eps under all three methods of financing : Compute EPS under all three methods of financing the expansion at $8.0 million in sales (first year) and $10.9 million in sales (last year). (Round your answers to 2 decimal places. Omit the "tiny_mce_markerquot; sign in your response.)

User Account

All Pages