cl Not secure ! tpo Stering Optcal and Royal Optical both make glass frames and

Question

cl Not secure ! tpo Stering Optcal and Royal Optical both make glass frames and each is able to generate earnings betore interest and taxes af $162,80o. The separate captal structures for Sherting and Royal are Dette 11% Common stock, 5 par Total $ 888 000 Debt @ 11% 1 3000 Total s 296 000 .184 000 592.000 Common stock, $5 par 118,400 Common shares 36.800 a. Compute eamings per share for both nrms. Assume a 30 percent tax rate (Round your answers to 2 decimali places.) Saring Royal b. in part a you should have gotten the same answer for both companies eamings per share Assuming & PIE rato of 20 for each company, what wourd ts sock price de? IDo not round intermediate calculations. Round your answer to 2 decimal places.) Stock prce c. Now as par of your analyss assume the PIE rato would be 14 for the risker company in terms of heaey oebt utrieation in the cacitai stucture 3n3 25 tor the less rsy company what soud me stock prices for the two ms be under these assumptions? (Note Although interest rates alsa would ikety be different based on risk we wit nhoia mem constant for ease of intermediate caliculations. Round your answers to 2 decimal places.) ansly ses.J jDe not round 9A.9

Explanation / Answer

Solution-

Particular Sterling Royal Earning before interest and tax(EBIT) 1,62,800 1,62,800 Less: Interest 97,680 32,560 Earning before tax (EBT) 65,120 1,30,240 Less : Taxes@30% 19,536 39,072 Earning after tax (EAT)-A 45,584 91,168 No. Of common shares-B 118400 236800 a) Earning per share-A/B 0.385 0.385 b) P/E ratio 20 20 Stock price = P/E ratio * EPS 7.70 7.70 C)P/E ratio* 14 25 Stock price= P/ E ratio*EPS 107.80 192.50 * Ratio of debt utilisation= debt/ total capital 0.60 0.20 Riskier

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