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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Lancaster corporation
Sales	\(246,000
Cost of goods sold	122,000
Gross profit	\)124,000
Fixed charges (other than interest)	27,500
Income before interest and taxes	\(96,500
Interest	21,800
Income before taxes	\)74,700
Taxes (35%)	26,145
Income after taxes	$48,555

	Capable corporation	Muli-media inc
Net income	\(31,200	\)140,000
Sales	317,000	2,700,000
Total assets	402,000	965,000
Total debts	163,000	542,000
Stockholder鈥檚 equity	239,000	423,000

Cash	\)163,000
Accounts receivable	924,000
Inventory	1,063,000
New plant and equipment	520,000
Total assets	$2,670,000

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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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