Chapter 2: 18BP_a (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
a. Compute earnings per share for both firms. Assume a 25 percent tax rate.

Expert verified

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

Step by step solution

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

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

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	20X1	20X2
Sales	\(3,230,000	\)3,370,000
Cost of goods sold	2,130,000	2,850,000
Gross profits	\(1,100,000	\)520,000
Selling and administrative expenses	298,000	227,000
Operating profits	\(802,000	\)293,000
Interest expense	47,200	51,600
Income before taxes	\(754,800	\)241,400
Taxes (35%)	264,180	84,490
Income after tax	\(490,620	\)156,910