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Compute eps for both firms

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Black Berry Farms and Pea Pod Farms are each able to generate EBIT of $120,000. The separate capital structures for Black Berry and Pea Pod are presented below.

Black Berry Pea Pod

Debt @ 7% $ 600,000 Debt @ 7% $ 200,000

Common stock 500,000 Common stock 900,000

Total $1,100,000 Total $1,100,000

Common shares 80,000 Common shares 144,000

a. Compute EPS for both firms (assume a 20 percent tax rate).

b. Assuming a P/E ratio of 18 for each firm, what would be each firm's share price?

c. Assume the P/E ratio would be 15 for the riskier company in terms of heavy debt utilization in the capital structure and 21 for the less risky firm. What would the share price now be for each firm?

d. Based on the evidence in part c, should management be concerned about the impact of financing plans on EPS or should share price also be considered?

Reference no: EM133272514

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