18BP Botox Facial Care had earnings a... [FREE SOLUTION]

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Foundations Of Financial Management

Stanley B. Block, Geoffrey A. Hirt, Bartley Danielsen

Business Studies

16th Edition 路 768 pages

ISBN: 9781259277160

Chapter 2: 18BP (page 51)

Botox Facial Care had earnings after taxes of $370,000 in 20X1 with 200,000 shares of stock outstanding. The stock price was $31.50. In 20X2, earnings after taxes increased to $436,000 with the same 200,000 shares outstanding. The stock price was $42.00
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.
b. Compute earnings per share and the P/E ratio for 20X2.
c. Give a general explanation of why the P/E ratio changed.

Short Answer

Expert verified

(a) For the year 20X1,

Earning per share: $1.85

P/E ratio: 17.03

(b) For the year 20X2,

Earning per share: $2.18

P/E ratio: 19.27

Step by step solution

Earning per share for 20X1

$E a r n i n g s p e r s h a r e = \frac{E a r n i n g s a f t e r t a x}{N o o f o u t s \tan d i n g s h a r e s} = \frac{$ 370, 000}{200, 000} = $ 1.85$

Calculation of P/E ratio

$P / E R a t i o = \frac{S t o c k p r i c e}{E a r n i n g p e r s h a r e} = \frac{$ 31.50}{$ 1.85} = 17.03$

Earning per share for 20X2

$E a r n i n g s p e r s h a r e = \frac{E a r n i n g s a f t e r t a x}{N o o f o u t s \tan d i n g s h a r e s} = \frac{$ 436, 000}{200, 000} = $ 2.18$

Calculation of P/E ratio

$P / E R a t i o = \frac{S t o c k p r i c e}{E a r n i n g p e r s h a r e} = \frac{$ 42}{$ 2.18} = 19.27$

Explanation for the increase in the P/E ratio

The P/E ratio is computed by dividing the market price of the share by the earning per share. Hence, when the market price of the share goes up, the P/E ratio also increases.

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Taxes	Earning per share
Share Outstanding	Earning before taxes
Interest Expense	Cost of goods sold
Depreciation Expense	Earning after taxes
Preferred Stcok dividends	Earning available to common stockholders
Sales	Selling and administrative expense
Gross profit

Yearly sales (credit)	\(420,000
Inventory turnover	7 times
Current liabilities	\)80,000
Current ratio	2
Average collection period	36 days
Current assets:
Cash
Accounts receivable
Inventory
Total current assets

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Short Answer

Step by step solution

Earning per share for 20X1

Calculation of P/E ratio

Earning per share for 20X2

Calculation of P/E ratio

Explanation for the increase in the P/E ratio

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