Pulp Paper Company and Holt Paper Company are each able to generate EBIT of $150,000. The separate capital structures for Pulp and Holt are presented below.

a. Compute EPS for both firms (assume a 40 percent tax rate).
$ 400,000
1,100,000
$1,500,000
220,000
b. Assuming a P /E ratio of 20 for each firm, what would be each firm's share price?
c. Assume the P /E ratio would be 15 for the riskier company in terms of heavy debt utilization in the capital structure and 26 for the less risky firm. What would the share price now be for each firm?
d. Based on the evidence in part c, should management be concerned about the impact of financing plans on EPS or should share price also be considered?

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Pulp Holt Debt @ 10% .. $ 800,000 Debt @ 10%... Common stock $ 400,000 Common stock 700,000 $1,500,000 1,100,000 $1,500,000 Total... Total... Common shares Common shares . 140,000 220,000