18BP_b Sterling Optical and Royal Optic... [FREE SOLUTION]

Stanley B. Block, Geoffrey A. Hirt, Bartley Danielsen

Business Studies

16th Edition 路 768 pages

ISBN: 9781259277160

Chapter 2: 18BP_b (page 149)

Sterling Optical and Royal Optical both make glass frames and each is able to generate earnings before interest and taxes of $132,000. The separate capital structures for Sterling and Royal are shown here:
Sterling
Royal
Debt @12%
$660,000
Debt @12%
$220,000
Common stock, $5 par
440,000
Common stock, $5 par
880,000
Total
$1,100,000
Total
$1,100,000
Common shares
88,000
Common shares
176,000
b. In part a, you should have gotten the same answer for both companies鈥� earnings per share. Assuming a P/E ratio of 22 for each company, what would its stock price be?

Expert verified

The EPS of Sterling optical and royal optical is $9.90.

$\begin{array}{rcl} Stock price & = & EPS 脳 P / E ratio \\ = & $ 0.45 脳 22 \\ = & $ 9.90 \end{array}$

$\begin{array}{rcl} Stock price & = & EPS 脳 P / E ratio \\ = & $ 0.45 脳 22 \\ = & $ 9.90 \end{array}$

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Times mirror and glass company
Sales	\)126,000
Less: Cost of goods sold	93,000
Gross profit	\(33,000
Less: selling and administrative expenses	11,000
Lease Expenses	4,000
Operating profit*	\)18,000
Less: Interest expenses	3,000
Earning before taxes	\(15,000
Less: Taxes (30%)	4,500
Earning after taxes	\)10,500