18. Leverage and stockholder wealth (L04) Sterling Optical and Royal Optical both make glass frames and each is able to generate earnings before interest and taxes of $120,000 The separate capital structures for Sterling and Royal are shown below: Sterling Royal Debt @ 12%..... S 600,000 Debt @ 12%..... $ 200,000 Common stock, $5 par..... 400,000 Common stock, 55 par 800,000 Total........... $1,000,000 Total..... $1,000,000 Common shares.............. 80,000 Common shares............ 160.000 a. Compute earnings per share for both firms. Assume a 25 percent tax rate. b. In part a, you should have gotten the same answer for both companies' earnings per share. Assuming a P/E ratio of 20 for each company, what would its stock price be? Now as part of your analysis, assume the P/E ratio would be 16 for the riskier company in terms of heavy debt utilization in the capital structure and 25 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.) Based on the evidence in parte, should management only be concerned about the impact of financing plans on earnings per share or should stockholders' wealth maximization (stock price) be considered as well