12. Price/earnings ratio Botox Facial Care had earnings after taxes of $280,000

Question

12. Price/earnings ratio 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 earnings per share. b. Compute earnings per share and the P/E ratio for 2010. c. Give a general explanation of why the P/E ratio changed

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.

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