Question

The capital structure for Cain Supplies is presented below. Compute the stock price for Cain if it sells at 19 times earnings per share and EBIT is \(50,000. The tax rate is 20 percent.

Cain
Debt @9%	\)100,000
Common stock, \(10 par	200,000
Total	\)300,000
Common shares	20,000

Short answer

The stock price of the company is $31.16.

Step-by-step solution

Calculation of earning per share

Earning before interest and taxes	$50,000
Less: Interest ($100,000 x 9%)	9,000
Earning before tax	$41,000
Tax @ 20%	8,200
Earning after tax	$32,800
Number of shares	20,000
EPS (EAT/No. of shares)	1.64

Calculation of stock price

$\begin{array}{rcl}\mathrm{Stock}\mathrm{price}& =& \mathrm{P}/\mathrm{E}\mathrm{Ratio}\times \mathrm{EPS}\\ & =& 19\times 1.64\\ & =& \$31.16\end{array}$