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Two capital goods manufacturing companies, Rock and Devon, are virtually identical in all aspects of their operations -product lines, amount of sales, total size, and
Two capital goods manufacturing companies, Rock and Devon, are virtually identical in all aspects of their operations -product lines, amount of sales, total size, and so on. The two companies differ only in their capital structures as show here: Each company has R1 billion total assets. Capital goods manufactures typically are subject to cyclical trends in the economy. Suppose the EBIT level for both companies is R100 million during an expansion and R60 million during recession. (assume a 40% tax rate for both companies). Required: 5.1. Calculate the earnings per share for both companies during expansion and recession. 5.2. Which share is riskier? Why? 5.3. At what EBIT level are the earnings per share of the two companies identical? 5.4. Calculate the common stock (share) price for both companies during an expansion if the share market assigns a price-earnings ratio of 10 to Davon and 9 to Rock. What conclusion can be drawn from this calculation? Two capital goods manufacturing companies, Rock and Devon, are virtually identical in all aspects of their operations -product lines, amount of sales, total size, and so on. The two companies differ only in their capital structures as show here: Each company has R1 billion total assets. Capital goods manufactures typically are subject to cyclical trends in the economy. Suppose the EBIT level for both companies is R100 million during an expansion and R60 million during recession. (assume a 40% tax rate for both companies). Required: 5.1. Calculate the earnings per share for both companies during expansion and recession. 5.2. Which share is riskier? Why? 5.3. At what EBIT level are the earnings per share of the two companies identical? 5.4. Calculate the common stock (share) price for both companies during an expansion if the share market assigns a price-earnings ratio of 10 to Davon and 9 to Rock. What conclusion can be drawn from this calculation
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