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

b. In part a, you should have gotten the same answer for both companies’ earnings per share. Assuming a P/E ratio of 22 for each company, what would its stock price be?

Short answer

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

Step-by-step solution

Stock price of sterling opticals

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

Stock price of royal opticals

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