Reference no: EM132531443

Pulp Paper Company and Holt Paper Company are each able to generate EBIT of $150,000. The separate capital structures for Pulp and Holt are presented below.

Pulp Holt Debt @ 10% $800,000            Debt @ 10% $400,000

Common stock 700,000                    Common stock 1,100,000

Total $1,500,000                                 Total $1,500,000

• Common shares 140,000 Common shares 220,000

Question a. Compute EPS for both firms (assume a 40 percent tax rate). (Round the final answers to 2 decimal places.)

Question b. Assuming a P/E ratio of 20 for each firm, what would be each firm's share price?

Question c. Assume the P/E ratio would be 15 for the riskier company in terms of heavy debt utilization in the capital structure and 26 for the less risky firm. What would the share price now be for each firm? (Round the final answers to 2 decimal places.)