Black Berry Farms and Pea Pod Farms are each able to generate EBIT of $168,000. The separate capital structures for Black Berry an Pea Pod are presented below. Black Berry Debt @ 8% Common stock Total Common shares EPS $1,100,000 1,000,000 $2,100,000 Share price Debt @ 8% Common stock Share price 200,000 Common shares Total a. Compute EPS for both firms (assume a 40 percent tax rate). (Round the final answers to 2 decimal places.) Black Berry $ Pea Pod $ Black Berry $ Pea Pod b. Assuming a P/E ratio of 31 for each firm, what would be each firm's share price? (Round your intermediate calculations and final answers to 2 decimal places.) Black Berry $ $700,000 1,400,000 $2,100,000 Pea Pod $ 280,000 c. Assume the P/E ratio would be 22 for the riskier company in terms of heavy debt utilization in the capital structure and 33 for the less risky firm. What would the share price now be for each firm? (Round your intermediate calculations and final answers to 2 decimal places.) Pea Pod $
Black Berry Farms and Pea Pod Farms are each able to generate EBIT of $168,000. The separate capital structures for Black Berry an Pea Pod are presented below. Black Berry Debt @ 8% Common stock Total Common shares EPS $1,100,000 1,000,000 $2,100,000 Share price Debt @ 8% Common stock Share price 200,000 Common shares Total a. Compute EPS for both firms (assume a 40 percent tax rate). (Round the final answers to 2 decimal places.) Black Berry $ Pea Pod $ Black Berry $ Pea Pod b. Assuming a P/E ratio of 31 for each firm, what would be each firm's share price? (Round your intermediate calculations and final answers to 2 decimal places.) Black Berry $ $700,000 1,400,000 $2,100,000 Pea Pod $ 280,000 c. Assume the P/E ratio would be 22 for the riskier company in terms of heavy debt utilization in the capital structure and 33 for the less risky firm. What would the share price now be for each firm? (Round your intermediate calculations and final answers to 2 decimal places.) Pea Pod $
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Black Berry Farms and Pea Pod Farms are each able to generate EBIT of $168,000. The separate capital structures for Black Berry and
Pea Pod are presented below.
Debt @ 8%
Common stock
Total
Common shares
Black Berry
EPS
Share price
$1,100,000
1,000,000
$2,100,000
Debt @ 8%
Common stock
Share price
200,000 Common shares
Total
a. Compute EPS for both firms (assume a 40 percent tax rate). (Round the final answers to 2 decimal places.)
Pea Pod
Black Berry
$
Black Berry
Pea Pod
b. Assuming a P/E ratio of 31 for each firm, what would be each firm's share price? (Round your intermediate calculations and final
answers to 2 decimal places.)
Black Berry
$700,000
1,400,000
$2,100,000
Pea Pod
280,000
c. Assume the P/E ratio would be 22 for the riskier company in terms of heavy debt utilization in the capital structure and 33 for the
less risky firm. What would the share price now be for each firm? (Round your intermediate calculations and final answers to 2
decimal places.)
Pea Pod
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