Sterling Optical andRoyal Optical both make glass frames and each is able to generateearnings before interest and taxes of $136,000. The separatecapital structures for Sterling and Royal are shown here:

Sterling		Royal
Debt @ 10%	$	816,000		Debt @ 10%	$	272,000
Common stock, $5par		544,000		Common stock, $5par		1,088,000
Total	$	1,360,000		Total	$	1,360,000
Commonshares		108,800		Commonshares		217,600

a. Compute earnings per share for both firms.Assume a 30 percent tax rate. (Round your answers to 2decimal places.)

b. In part a, you should have gotten thesame answer for both companies’ earnings per share. Assuming a P/Eratio of 21 for each company, what would its stock price be?(Do not round intermediate calculations. Round your answerto 2 decimal places.)

c. Now as part of your analysis, assume the P/Eratio would be 15 for the riskier company in terms of heavy debtutilization in the capital structure and 25 for the less riskycompany. What would the stock prices for the two firms be underthese assumptions? (Note: Although interest rates also would likelybe different based on risk, we will hold them constant for ease ofanalysis.) (Do not round intermediate calculations. Roundyour answers to 2