wo 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 (7%)$200$600Common equity$900$500Number of common shares outstanding3620

Each company has $1,100 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 $90 million during an expansion and $70 million during a recession. (Assume a 40% tax rate for both companies.)

1. Calculate the earnings per share for both companies during expansion and recession. Round your answers to the nearest cent.
2. Rock IslandDavenportExpansion:$$Recession:$$
3. Which stock is riskier? Why?
4. -Select-
5. Rock Island
6. Davenport
7. Item 5
8. is riskier because of its-Select-
9. financial
10. business
11. market
12. bankruptcy
13. Item 6
14. risk.
15. 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.
16. $million
17. Calculate the common stock price for both companies during an expansion if the stock market assigns a price-to-earnings ratio of 9 to Davenport and 8 to Rock Island. Round your answers to the nearest cent.
18. Rock Island: $
19. Davenport: $