Question
Pulp Paper Company and Holt Paper Company are each able to generate EBIT of $264,000. The separate capital structures for Pulp and Holt are presented
Pulp Paper Company and Holt Paper Company are each able to generate EBIT of $264,000. The separate capital structures for Pulp and Holt are presented below.
Pulp | Holt | |||||
Debt @ 11% | $1,250,000 | Debt @ 11% | $850,000 | |||
Common stock | 1,150,000 | Common stock | 1,550,000 | |||
Total | $2,400,000 | Total | $2,400,000 | |||
Common shares | 230,000 | Common shares | 310,000 | |||
a. Compute EPS for both firms (assume a 40 percent tax rate). (Round the final answers to 2 decimal places.)
Pulp | Holt | |
EPS | $ | $ |
b. Assuming a P/E ratio of 34 for each firm, what would be each firms share price? (Do not round intermediate calculations. Round the final answers to 2 decimal places.)
Pulp | Holt | |
Share price | $ | $ |
c. Assume the P/E ratio would be 29 for the riskier company in terms of heavy debt utilization in the capital structure and 40 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.)
Pulp | Holt | |
Share price | $ | $ |
d. Not available in Connect.
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