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Stilley Corporation had earnings after taxes of $420,000 in 20X2 with 280,000 shares outstanding. The stock...

Stilley Corporation had earnings after taxes of $420,000 in 20X2 with 280,000 shares outstanding. The stock price was $45.60. In 20X3, earnings after taxes declined to $294,000 with the same 280,000 shares outstanding. The stock price declined to $32.00.

a. Compute earnings per share and the P/E ratio for 20X2. (Do not round intermediate calculations. Round your final answers to 2 decimal places.)

b. Compute earnings per share and the P/E ratio for 20X3. (Do not round intermediate calculations. Round your final answers to 2 decimal places.)

Expert Solution

Sol:

a)

Earnings after tax 20X2 = $420,000

Outstanding shares = 280000

Stock price = $45.60

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

Earnings per share for 20X2 = Earnings after tax 20X2 / Outstanding shares

Earnings per share for 20X2 = 420000 / 280000 = $1.50

P/E ratio = Stock price / Earnings per share for 20X2

P/E ratio = 45.60 / 1.50 = 30.40 times

Therefore earnings per share and the P/E ratio for 20X2 will be $1.50 and 30.40 times respectively.

b)

Earnings after tax 20X3 = $294,000

Outstanding shares = 280000

Stock price = $32

Compute earnings per share and the P/E ratio for 20X3:

Earnings per share for 20X3 = Earnings after tax 20X3 / Outstanding shares

Earnings per share for 20X3 = 294000 / 280000 = $1.05

P/E ratio = Stock price / Earnings per share for 20X3

P/E ratio = 32 / 1.05 = 30.48 times

Therefore earnings per share and the P/E ratio for 20X3 will be $1.05 and 30.48 times respectively.

jeff jeffy answered 1 year ago

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