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Botox Facial Care had earnings after taxes of $336,000 in 20X1 with 200,000 shares of stock outstanding
Botox Facial Care had earnings after taxes of $336,000 in 20X1 with 200,000 shares of stock outstanding. The stock price was $95.60. In 20X2, earnings after taxes increased to $408,000 with the same 200,000 shares outstanding. The stock price was $104.00.
a. Compute earnings per share and the P/E ratio for 20X1. (The P/E ratio equals the stock price divided by earnings per share.) (Do not round intermediate calculations. Round your final answers to 2 decimal places.)
Earnings per share
P/E ratio
times
b. Compute earnings per share and the P/E ratio for 20X2. (Do not round intermediate calculations. Round your final answers to 2 decimal places.)
Earnings per share
?
PIE ratio
times
c. Why did the P/E ratio change? (Do not round intemediate calculations. Input your answers as percents rounded to 2 decimal places.)
Expert Solution
| Computation of Earning per Share and P/E Ratio for 20x1: | |||
| P/E Ratio = Share Price / Earnings per Share | |||
| Particulars | 20x1 | 20x2 | |
| A | Earning after tax | $336,000.00 | $408,000 |
| B | No. of shares outstanding | 200000 | 200,000 |
| C = A/B | Earnings per share | 1.68 | 2.04 |
| D | Share price | $95.60 | $104 |
| E = D / C | P/E Ratio (times) | 56.90 | 50.98 |
|
The share price increased 8.79% while EPS increased 21.43% 20x2 when compared to 20x1. |
|
Since the % of EPS increase is more than the share price increase PE ratio reduced. |
Workings:
Increase in Share Price = ($104-$95.60)/$95.60 = 8.79%
Increase in Earning per Share (EPS) = (2.04-1.68)/1.68 = 21.43%
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