Sarah Bailey is analyzing two stocks in the semiconductor industry. It is her

intention to assign a $\frac{P}{E}$ of $16$ to the average firm in the industry. However,

she will assign a $20$ percent premium to the $\frac{P}{E}$ of a company that uses con$-$

servative financing in its capital structure. This is because of the highly cyclical

nature of the industry.

Two firms in the industry have the following financial data:

a$.$ Compute return on stockholders' equity for each firm. Use the DuPont

method of analysis. Which is higher?

b$.$ Compute earnings per share for each company. Which is higher?

c$.$ Applying the $20$ percent premium to the $\frac{P}{E}$ ratio of the firm with the more

conservative financial structure and the industry $\frac{P}{E}$ ratio to the other firm,

which firm has the higher stock price valuation?