Problem 2-18 Price-earnings ratio [LO2] Botox Facial Care had earnings after tax
ID: 2377446 • Letter: P
Question
Problem 2-18 Price-earnings ratio [LO2]
Botox Facial Care had earnings after taxes of $280,000 in 2009 with 200,000 shares of stock outstanding. The stock price was $30.80. In 2010, earnings after taxes increased to $320,000 with the same 200,000 shares outstanding. The stock price was $40.00.
Compute earnings per share and the P/E ratio for 2009. The P/E ratio equals the stock price divided by earnings per share. (Enter only numeric values. Round intermediate calculations and EPS answer to 2 decimal places. Omit the "$" sign in your response.)
Compute earnings per share and the P/E ratio for 2010. (Enter only numeric values. Round intermediate calculations and EPS answer to 2 decimal places. Omit the "$" sign in your response.)
Give a general explanation of why the P/E ratio changed. (Round your intermediate calculations and final answers to 2 decimal places. Omit the "%" sign in your response.)
Problem 2-17 Earnings per share and retained earnings [LO1, 3]
Quantum Technology had $640,000 of retained earnings on December 31, 2010. The company paid common dividends of $30,000 in 2010 and had retained earnings of $500,000 on December 31, 2009.
How much did Quantum Technology earn during 2010? (Omit the "$" sign in your response.)
What would earnings per share be if 40,000 shares of common stock were outstanding? (Round your answer to 2 decimal places. Omit the "$" sign in your response.)
Botox Facial Care had earnings after taxes of $280,000 in 2009 with 200,000 shares of stock outstanding. The stock price was $30.80. In 2010, earnings after taxes increased to $320,000 with the same 200,000 shares outstanding. The stock price was $40.00.
Explanation / Answer
Botox Facial Care had earnings after taxes of $280,000 in 2009 with 200,000 shares of stock outstanding. The stock price was $30.80. In 2010, earnings after taxes increased to $320,000 with the same 200,000 shares outstanding. The stock price was $40.00.(a) Compute earnings per share and the P/E ratio for 2009. The P/E ratio equals the stock price divided by the earnings per share.
280,000 / 200,000 = $1.40 EPS
30.80 / 1.40 = 22 P/E ratio
(b) Compute earnings per share and the P/E ratio for 2010.
320,000 /200,000 = $1.60 EPS
40 / 1.60 = 25 P/E ratio
(c) Give a general explanation of why the P/E ration changed.
The market price of the stock increased at a higher rate than earnings.
Second part:
From the problem above, assume for Botox Facial Care that in 2011, earnings after taxes declined to $140,000 with the same $200,000 shares outstanding .
The stock price declined to $24.50.
a. Compute earnings per share and the P/E ratio for 2011.
140,000 / 200,000 = $0.70 EPS
24.50 / 0.70 = 35
b. Give a general explanation of why the P/E changed.
Earnings decreased at a higher rate than the market price of the stock.
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