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a. Compute earnings per share for both firms. Assume a 20 percent tax rate. Note: Round your answers to 2 decimal places.

a. Compute earnings per share for both firms. Assume a 20 percent tax rate. Note: Round your answers to 2 decimal places.

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Sterling Optical and Royal Optical both make glass frames and each is able to generate earnings before interest and taxes of $144,000. The separate capital structures for Sterling and Royal are shown here: Sterling Royal Debt @ 12% Common stock, $5 par $ 720,000 480,000 Total $ 1,200,000 Debt @ 12% Common stock, $5 par Total $ 240,000 960,000 $ 1,200,000 Common shares 96,000 Common shares 192,000 a. Compute earnings per share for both firms. Assume a 20 percent tax rate. Note: Round your answers to 2 decimal places. Sterling Royal Earnings per Share b. In part a, you should have gotten the same answer for both companies' earnings per share. Assuming a price-earnings (P/E) ratio of 20 for each company, what would its stock price be? Note: Do not round intermediate calculations. Round your answer to 2 decimal places. Stock price c. Now as part of your analysis, assume the P/E ratio would be 14 for the riskier company in terms of heavy debt utilization in the capital structure and 23 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.) Note: Do not round intermediate calculations. Round your answers to 2 decimal places. Sterling Royal Stock Price
Transcribed Image Text:Sterling Optical and Royal Optical both make glass frames and each is able to generate earnings before interest and taxes of $144,000. The separate capital structures for Sterling and Royal are shown here: Sterling Royal Debt @ 12% Common stock, $5 par $ 720,000 480,000 Total $ 1,200,000 Debt @ 12% Common stock, $5 par Total $ 240,000 960,000 $ 1,200,000 Common shares 96,000 Common shares 192,000 a. Compute earnings per share for both firms. Assume a 20 percent tax rate. Note: Round your answers to 2 decimal places. Sterling Royal Earnings per Share b. In part a, you should have gotten the same answer for both companies' earnings per share. Assuming a price-earnings (P/E) ratio of 20 for each company, what would its stock price be? Note: Do not round intermediate calculations. Round your answer to 2 decimal places. Stock price c. Now as part of your analysis, assume the P/E ratio would be 14 for the riskier company in terms of heavy debt utilization in the capital structure and 23 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.) Note: Do not round intermediate calculations. Round your answers to 2 decimal places. Sterling Royal Stock Price
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