Stilley Corporation had earnings after taxes of $444,000 in 2013 with 240,000 sh

Question

Stilley Corporation had earnings after taxes of $444,000 in 2013 with 240,000 shares outstanding. The stock price was $43.60. In 2014, earnings after taxes declined to $252,000 with the same 240,000 shares outstanding. The stock price declined to $29.80. a. Compute earnings per share and the P/E ratio for 2013. (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 2014. (Do not round intermediate calculations. Round your final answers to 2 decimal places.) Earnings per share $ P/E ratio times

Explanation / Answer

a. Earnings per share as the name says, it is the amount of profit available per outstanding share. It is calculated using the formula

Earnings per share = (Net Profit after Taxes – Preference Dividends) / Number of Equity Shares

In 2013, Earnings after tax is $444,000. We do not have any preference dividends. Number of shares outstanding is 240,000.

Earnings per share = (444,000-0)/240,000 = $1.85

P/E ratio or Price- Earnings ratio is the ratio of the current market price in relation to the earnings per share.

In 2013, Stock price was $ 43.60 and the earning per share we have above is $ 1.85. So the P/E ratio is

Current market price / Earnings per share = 43.60/1.85 = 23.57.

Earnings per share $ P/E ratio times is calculated using the formula

Earnings per share ÷ P/E ratio = 1.85 ÷ 23.57 = 0.08

b. Earnings per share as the name says, it is the amount of profit available per outstanding share. It is calculated using the formula

Earnings per share = (Net Profit after Taxes – Preference Dividends) / Number of Equity Shares

In 2014, Earnings after tax is $252,000. We do not have any preference dividends. Number of shares outstanding is 240,000.

Earnings per share = (252,000-0)/240,000 = $1.05

P/E ratio or Price- Earnings ratio is the ratio of the current market price in relation to the earnings per share.

In 2014, Stock price was $ 29.80 and the earning per share we have above is $ 1.05. So the P/E ratio is

Current market price / Earnings per share = 29.80/1.05 = 28.38

Earnings per share $ P/E ratio times is calculated using the formula

Earnings per share ÷ P/E ratio = 1.05 ÷ 28.38 = 0.04

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