Question

Sterling Optical and Royal Optical both make glass frames and each is able to generate earnings before interest and taxes of $136,000. The separate capital structures for Sterling and Royal are shown here: Sterling Debt @ 10% Common stock, $5 par Total Common shares Royal $ 816,000 Debt @ 10% 544,000 Common stock, $5 par $1,360,000 Total 108,800 Common shares $ 272,000 1,088,000 $1,360,000 217,600 a. Compute earnings per share for both firms. Assume a 30 percent tax rate. (Round your answers to 2 decimal places.) Earnings per Share Sterling Royal b. In part a, you should have gotten the same answer for both companies' earnings per share. Assuming a P/E ratio of 21 for each company, what would its stock price be? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Answer 1

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a) Sterling Royal EPS $ $ 0.52 (136000-544000*10%)*(1-.30)/108000 0.08 (136000-1088000*10%)*(1-.30)/217600 b) Stock price Sterling Royal $ 10.92 (5.52*21) $ 1.68 (5.08*21) c) Sterling Royal $ $ 7.80 0.52*15) 2.00 (0.08*25)