Question
Sterling Optical and Royal Optical both make glass frames and each is able to generate earnings before interest and taxes of $132,000. The separate capital
Sterling Optical and Royal Optical both make glass frames and each is able to generate earnings before interest and taxes of $132,000. The separate capital structures for Sterling and Royal are shown here: Sterling Royal Debt @ 12% $ 660,000 $ 220,000 Common stock, $5 par 440,000 880,000 Total $ 1,100,000 $ 1,100,000 Common shares 88,000 176,000 a. Compute earnings per share for both firms. Assume a 25 percent tax rate. (Round your answers to 2 decimal places.) Earnings per Share Sterling $ Royal $ b. In part a, you should have reached the same answer for both companies earnings per share. Assuming a P/E ratio of 22 for each company, what would its share price be? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Share price $ c. 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 24 for the less risky company. What would the share 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.) (Do not round intermediate calculations. Round your answers to 2 decimal places.) Share Price Sterling $ Royal $ d. This part of the question is not part of your Connect assignment.
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