Botox Facial Care had earnings after taxes of 284000 in 20X1

Botox Facial Care had earnings after taxes of $284,000 in 20X1 with 200,000 shares of stock outstanding. The stock price was $45.80. In 20X2, earnings after taxes increased to $350,000 with the same 200,000 shares outstanding. The stock price was $56.00.

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.)
  

Solution

a Earnings per share = 284000/200000= 1.42 P/E ratio = 45.8/1.42= 32.25 b Earnings per share = 350000/200000= 1.75 P/E ratio = 56/1.75= 32.00 c Stock price increase = (56-45.8)/45.8= 22.27% EPS increase = (1.75-1.42)/1.42= 23.24% The stock price increased by 22.27% while EPS increased by 23.24%