Question

Botox Facial Care had earnings after taxes of $350,000 in 20X1 with 200,000 shares of stock outstanding. The stock price was $72.50. In 20X2, earnings after taxes increased to $420,000 with the same 200,000 shares outstanding. The stock price was $83.00. 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.) 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.) c. Why did the P/E ratio change

Answer 1

Answer:

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

EPS = $1.75 per stock

P/E ratio = 41.43

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

EPS = $2.10 per stock

P/E ratio = 39.52

Explanation:

after taxes net income $350,000 in 20x1

200,000 outstanding common stocks

stock price $72.50

after taxes net income $420,000 in 20x2

200,000 outstanding common stocks

stock price $83.00

EPS = net income / outstanding stocks

20x1 = $350,000 / 200,000 = $1.75 per stock

20x2 = $420,000 / 200,000 = $2.10 per stock

P/E ratio = stock price / EPS

20x1 = $72.50 / $1.75 = 41.43

20x2 = $83.00 / $2.10 = 39.52