Two capital goods manufacturing companies, Rock Island and Davenport, are virtually identical in all aspects of their operationsproduct lines, amount of sales, total size, and so on. The two companies differ only in their capital structures, as shown here:

	Rock Island (millions)			Davenport (millions)
Debt (5%)		$400			$600
Common equity		$500			$300
Number of common shares outstanding		100			60

Each company has $900 billion in total assets.

Capital goods manufacturers typically are subject to cyclical trends in the economy. Suppose that the EBIT level for both companies is $130 million during an expansion and $100 million during a recession. (Assume a 40% tax rate for both companies.)

Calculate the earnings per share for both companies during expansion and recession. Round your answers to the nearest cent.

	Rock Island	Davenport
Expansion:	$	$
Recession:	$	$

Which stock is riskier? Why?

-Select-Rock IslandDavenportItem 5 is riskier because of its -Select-financialbusinessmarketbankruptcyItem 6 risk.

At what EBIT level are the earnings per share of the two companies identical? Enter your answer in millions. For example, an answer of $1 million should be entered as 1, not 1,000,000. Round your answer to the nearest whole number. $ million

Calculate the common stock price for both companies during an expansion if the stock market assigns a price-to-earnings ratio of 10 to Davenport and 7 to Rock Island. Round your answers to the nearest cent. Rock Island: $ Davenport: $