Question

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

a. Compute earnings per share for both firms. Assume a 25 percent tax rate.

Short answer

The EPS of both Sterling optical and Royal optical is $0.45.

Step-by-step solution

Calculation of earning per share of Sterling

Earning before interest and taxes	$132,000
Less: Interest ($660,000 x 12%)	79,200
Earning before tax	$52,800
Tax @ 25%	13,200
Earning after tax	$39,600
Number of shares	88,000
EPS (EAT/No. of shares)	$0.45

Calculation of earning per share of Royal

Earning before interest and taxes	$132,000
Less: Interest ($220,000 x 12%)	26,400
Earning before tax	105,600
Tax @ 25%	26,400
Earning after tax	$79,200
Number of shares	176,000
EPS (EAT/No. of shares)	$0.45