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

d. Based on the evidence in part c, should management be concerned only about the impact of financing plans on earnings per share, or should stockholders’ wealth maximization (stock price) be considered as well?

Short answer

The EPS of both the companies are same, but the stock price of royal optical is more than the sterling optical. The management should not only consider the impact of financing plan on EPS, management should also consider the stock price of the company because it represents the wealth of the stockholder’s.

Step-by-step solution

Financing plan

Financing plan is defined as the current money situation and the long term monetary objectives, as well as the strategies to achieve the objectives.

Stockholder’s wealth

The stockholder’s wealth means the aggregate wealth conferred on stockholders through their investment in the company. It is computed by multiplying the stockprice with the number of shares.The management of the company are concerned with both the financing plan impact on EPS and the stock price of the company.