Question

Botox Facial Care had earnings after taxes of $310,000 in 20X1 with 200,000 shares of stock outstanding. The stock price was $53.20. In 20X2, earnings after taxes increased to $392,000 with the same 200,000 shares outstanding. The stock price was $65.00.
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? (Do not round intemediate calculations. Input your answers as percents rounded to 2 decimal places.)

Answer 1

Answer:

(a) $1.55; 32.32

(b) $1.96; 33.16

Explanation:

a) EPS (20X1) = $310,000 ÷ 200,000

                      = $1.55

P/E ratio (20X1) = Price ÷ EPS

                          = $53.20 ÷ $1.55

                          = 32.32

b) EPS (20X2) = $392,000 ÷ 200,000

                       = $1.96

P/E ratio (20X2) = Price ÷ EPS

                           = $65 ÷ $1.96

                           = 33.16

c) The stock price increased by 22.18% while EPS only increased 26.45%.