wo capital goods manufacturing companies, Rock Island and Davenport, are virtually identical in all aspects of their operations—product lines, amount of sales, total size, and so on. The two companies differ only in their capital structures, as shown here: Rock Island (millions) Davenport (millions) Debt (5%) $400 $200 Common equity $500 $700 Number of common shares outstanding 25 35 Each company has $900 billion in total assets. Capital goods manufacturers typically are subject to cyclical trends in the economy. Suppose that the EBIT level for both companies is $90 million during an expansion and $60 million during a recession. (Assume a 40% tax rate for both companies.) Calculate the earnings per share for both companies during expansion and recession. Round your answers to the nearest cent. Rock Island Davenport Expansion: $ $ Recession: $ $ Which stock is riskier? Why? is riskier because of its risk. At what EBIT level are the earnings per share of the two companies identical? Enter your answer in millions. For example, an answer of $1 million should be entered as 1, not 1,000,000. Round your answer to the nearest whole number. $ million
wo capital goods manufacturing companies, Rock Island and Davenport, are virtually identical in all aspects of their operations—product lines, amount of sales, total size, and so on. The two companies differ only in their capital structures, as shown here:
| Rock Island (millions) | Davenport (millions) | |||||
| Debt (5%) | $400 | $200 | ||||
| Common equity | $500 | $700 | ||||
| Number of common shares outstanding | 25 | 35 |
Each company has $900 billion in total assets.
Capital goods manufacturers typically are subject to cyclical trends in the economy. Suppose that the EBIT level for both companies is $90 million during an expansion and $60 million during a recession. (Assume a 40% tax rate for both companies.)
- Calculate the earnings per share for both companies during expansion and recession. Round your answers to the nearest cent.
Rock Island Davenport Expansion: $ $ Recession: $ $ -
Which stock is riskier? Why?
is riskier because of its risk.
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At what EBIT level are the earnings per share of the two companies identical? Enter your answer in millions. For example, an answer of $1 million should be entered as 1, not 1,000,000. Round your answer to the nearest whole number.
$ million -
Calculate the common stock price for both companies during an expansion if the stock market assigns a price-to-earnings ratio of 9 to Davenport and 11 to Rock Island. Round your answers to the nearest cent.
Rock Island: $
Davenport: $
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Calculate the common stock price for both companies during an expansion if the stock market assigns a price-to-earnings ratio of 9 to Davenport and 11 to Rock Island. Round your answers to the nearest cent.
Rock Island: $
Davenport: $
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