Two capital goods manufacturing companies, Rock Island and Davenport, are virtually identical in all aspects of their operations—product lines, amount of sales, total size, and so on. The two companies differ only in their capital structures, as shown here: Rock Island (millions) Davenport (millions) Debt (7%) $200 $600 Common equity $900 $500 Number of common shares outstanding 36 20 Each company has $1,100 billion in total assets. Capital goods manufacturers typically are subject to cyclical trends in the economy. Suppose that the EBIT level for both companies is $90 million during an expansion and $70 million during a recession. (Assume a 40% tax rate for both companies.) Calculate the common stock price for both companies during an expansion if the stock market assigns a price-to-earnings ratio of 9 to Davenport and 8 to Rock Island. Round your answers to the nearest cent. Rock Island: $ Davenport: $
Two capital goods manufacturing companies, Rock Island and Davenport, are virtually identical in all aspects of their operations—product lines, amount of sales, total size, and so on. The two companies differ only in their capital structures, as shown here: Rock Island (millions) Davenport (millions) Debt (7%) $200 $600 Common equity $900 $500 Number of common shares outstanding 36 20 Each company has $1,100 billion in total assets. Capital goods manufacturers typically are subject to cyclical trends in the economy. Suppose that the EBIT level for both companies is $90 million during an expansion and $70 million during a recession. (Assume a 40% tax rate for both companies.) Calculate the common stock price for both companies during an expansion if the stock market assigns a price-to-earnings ratio of 9 to Davenport and 8 to Rock Island. Round your answers to the nearest cent. Rock Island: $ Davenport: $
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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Two capital goods manufacturing companies, Rock Island and Davenport, are virtually identical in all aspects of their operations—product lines, amount of sales, total size, and so on. The two companies differ only in their capital structures, as shown here:
| Rock Island (millions) | Davenport (millions) | |||||
| Debt (7%) | $200 | $600 | ||||
| Common equity | $900 | $500 | ||||
| Number of common shares outstanding | 36 | 20 |
Each company has $1,100 billion in total assets.
Capital goods manufacturers typically are subject to cyclical trends in the economy. Suppose that the EBIT level for both companies is $90 million during an expansion and $70 million during a recession. (Assume a 40% tax rate for both companies.)
Calculate the common stock price for both companies during an expansion if the stock market assigns a price-to-earnings ratio of 9 to Davenport and 8 to Rock Island. Round your answers to the nearest cent.
Rock Island: $
Davenport: $
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