Botox Facial Care had earnings after taxes of $326,000 in 20X1 with 200,000 shar

Question

Botox Facial Care had earnings after taxes of $326,000 in 20X1 with 200,000 shares of stock outstanding. The stock price was $90.50. In 20X2, earnings after taxes increased to $380,000 with the same 200,000 shares outstanding. The stock price was $102.00

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.)

Earning 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.)

Earning per share

P/E 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.)

The stock price percent with EPS percent

Explanation / Answer

a. Computation of earnings per share and the P/E ratio for 20X1

earnings per share (EPS) = Earnings after tax and preference dividend / no. of shares outstanding

= 326,000 / 200,000

= $1.63

P/E ratio for 20X1 = Stock price / EPS

= 90.50 / 1.63

= 55.52 times

b. Computation of earnings per share and the P/E ratio for 20X2

earnings per share (EPS) = Earnings after tax and preference dividend / no. of shares outstanding

= 380,000 / 200,000

= $1.90

P/E ratio for 20X2 = Stock price / EPS

= 102 / 1.90

= 53.68 times

c. Why did the P/E ratio change?

P/E ratio says how much money an investor is willing to pay for given earnings. Mathematically, it can be calculated as -Stock price / EPS. It is rapidly changing in nature as stock price changes every second.

In this case percent change in P/E ratio is -

(New P/E ratio - old P/E ratio) / old P/E ratio *100

= (53.68 - 55.52) / 55.52 *100

= -1.84 / 55.52 *100

= -3.31%

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