Question

Stering Optcal anoth make glass frames and each is able to generate earnings before interest and taxes of $126,000. The separate capital structures for Sterling and Royal are shown here: Stering Royal s 252,000 1,008,000 $1,260,000 201,600 756,000 504,000 Common stock, $5 par Dett@ 10% Debt @ 10% Common stock, $5 par Total Common shares $1,260,000 Total 100,800 Common shares a. Compute eamings per share for both firms. Assume a 20 percent tax rato. (Round your answers to 2 decimal places.) Earnings per Share Stering Royal b. In part a you should have gotten the same answer for both companies' ear ings per share. Assuming a PE ratio of 23 for each company what would its stock price be? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Stock price С.Now as part of your analysis, assume the P/E ratio would be 17 or the isor company in terms of heavy debt utization inthe capital structure and 20fore less risky company. What would the stock prices for the two firms be under these assumptions? (Note: Although interest rates also would likely be diferent based on risk, we will hold them constant for ease of analysis.) (Do not round intermediate calculations. Round your answers to 2 decimal places) Stock Price Stering Royal

Answer 1