Sterling optical and Royal Optical both make glass frames and each is able to generate earnings before interest and taxes of $120,000.Debt @12% $600,000 Debt @12% $200,000, Common stock, $5 par 400,000 Common stock, $5 par 800,000,Total 1,000,000 Total 1,000,000,Common shares 80,000 Common shares 160,000, Compute earnings per share for both firms. Assume a 25 percent tax
$0.45 for each company
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To compute the earnings per share (EPS) for both firms, we need to determine the net income first. Here is the step-by-step calculation for each firm:
1. Calculate the interest expense for both firms:
- Sterling Optical:
Interest Expense = Debt * Interest Rate
= $600,000 * 12% = $72,000
- Royal Optical:
Interest Expense = Debt * Interest Rate
= $200,000 * 12% = $24,000
2. Calculate the earnings before taxes (EBT) for both firms:
- Sterling Optical:
EBT = Earnings Before Interest and Taxes - Interest Expense
= $120,000 - $72,000 = $48,000
- Royal Optical:
EBT = Earnings Before Interest and Taxes - Interest Expense
= $120,000 - $24,000 = $96,000
3. Calculate the net income for both firms, considering a 25% tax rate:
- Sterling Optical:
Net Income = EBT * (1 - Tax Rate)
= $48,000 * (1 - 0.25) = $36,000
- Royal Optical:
Net Income = EBT * (1 - Tax Rate)
= $96,000 * (1 - 0.25) = $72,000
4. Calculate the earnings per share (EPS) for both firms:
- Sterling Optical:
EPS = Net Income / Common Shares
= $36,000 / 80,000 = $0.45 per share
- Royal Optical:
EPS = Net Income / Common Shares
= $72,000 / 160,000 = $0.45 per share
Therefore, both Sterling Optical and Royal Optical have an earnings per share (EPS) of $0.45 per share.
To compute the earnings per share (EPS) for both firms, we need to first calculate the net earnings after tax.
1. Calculate the interest expense for each firm:
a. For Sterling Optical: Debt * interest rate = $600,000 * 0.12 = $72,000
b. For Royal Optical: Debt * interest rate = $200,000 * 0.12 = $24,000
2. Calculate the earnings before tax for each firm:
Earnings before tax = Earnings before interest and taxes - Interest expense
a. For Sterling Optical: $120,000 - $72,000 = $48,000
b. For Royal Optical: $120,000 - $24,000 = $96,000
3. Calculate the net earnings after tax for each firm:
Net earnings after tax = Earnings before tax * (1 - Tax rate)
Assuming a 25 percent tax rate:
a. For Sterling Optical: $48,000 * (1 - 0.25) = $36,000
b. For Royal Optical: $96,000 * (1 - 0.25) = $72,000
4. Calculate the earnings per share (EPS) for each firm:
EPS = Net earnings after tax / Number of common shares
a. For Sterling Optical: $36,000 / 80,000 = $0.45 per share
b. For Royal Optical: $72,000 / 160,000 = $0.45 per share
Therefore, the earnings per share for both Sterling Optical and Royal Optical is $0.45 per share.