Question

Jerry Rice and Grain Stores has $4,800,000 in yearly sales. The firm earns 3 percent on each dollar of sales and

turns over its assets 3.5 times per year. It has $120,000 in current liabilities and $310,000 in long-term liabilities.   

a. What is its return on stockholders’ equity?  %(Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)

b. If the asset base remains the same as computed in part a, but total asset turnover goes up to 3.70, what will be the new return on stockholders’ equity? Assume that the profit margin stays the same as do current and long-term liabilities. (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)

New Return on Stockholder Equity ? %

 

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Question

Sterling Optical and Royal Optical both make glass frames and each is able to generate earnings before interest

and taxes of $113,600. The separate capital structures for Sterling and Royal are shown here:
 

Sterling		Royal
Debt @ 8%	$	852,000		Debt @ 8%	$	284,000
Common stock, $5 par		568,000		Common stock, $5 par		1,136,000
Total	$	1,420,000		Total	$	1,420,000
Common shares		113,600		Common shares		227,200

a. Compute earnings per share for both firms. Assume a 30 percent tax rate. (Round your answers to 2 decimal places.)
  Sterling=

Royal=

b. In part a, you should have gotten the same answer for both companies’ earnings per share. Assuming a P/E ratio of 24 for each company, what would its stock price be? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

stock price=

c. Now as part of your analysis, assume the P/E ratio would be 18 for the riskier company in terms of heavy debt utilization in the capital structure and 22 for the less risky company. What would the stock prices for the two firms be under these assumptions? (Note: Although interest rates also would likely be different based on risk, we will hold them constant for ease of analysis.) (Do not round intermediate calculations. Round your answers to 2 decimal places.)

Stock Price is

Sterling=

Royal=

 

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