Problem 5-15

Pulp Paper Company and Holt Paper Company are each able to generate EBIT of $140,000. The separate capital structures for Pulp and Holt are presented below.

PulpHoltDebt @ 7%$1,050,000Debt @ 7%$650,000Common stock950,000Common stock1,350,000Total$2,000,000Total$2,000,000Common shares190,000Common shares270,000

a.Compute EPS for both firms (assume a 40 percent tax rate).(Round the final answers to 2 decimal places.)

PulpHoltEPS$$

b.Assuming a P/E ratio of 30 for each firm, what would be each firm's share price?(Do not round intermediate calculations. Round the final answers to 2 decimal places.)

PulpHoltShare price$$

c.Assume the P/E ratio would be 21 for the riskier company in terms of heavy debt utilization in the capital structure and 32 for the less risky firm. What would the share price now be for each firm?(Do not round intermediate calculations. Round the final answers to 2 decimal places.)

PulpHoltShare price