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# Earnings Per Share and Price Earnings Ratio

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1. Burger Palace had earnings after taxes of \$900,000 in the year 2009 with 301,000 shares outstanding. On January 1, 2010, the firm issued 32,000 new shares. Because of the proceeds from these new shares and other operating improvements, earnings after taxes increased by 28 percent.
(a) Compute earnings per share for the year 2009. (Round your answer to 2 decimal places.
Earnings per share = \$ ..........
(b) Compute earnings per share for the year 2010.

2. Fabulous Day Spa had earnings after taxes of \$293,000 in 2009 with 200,000 shares of stock outstanding. The stock price was \$45.80. In 2010, earnings after taxes increased to \$320,000 with the same 200,000 shares outstanding. The stock price was \$74.00.
(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. (Enter only numeric values. Round your intermediate calculations and final answers to 2 decimal places).
Earnings per share = \$..........
P/E ratio =..............
(b) Compute earnings per share and the P/E ratio for 2010. (Enter only numeric values. Round your intermediate calculations and final answers to 2 decimal places.)
Earnings per share is \$...................
P/E ratio is ...............
(c) Why the P/E ratio changed? (Round your intermediate calculations and final answers to 2 decimal places).

#### Solution Preview

Please see the attached Word 97-2003 document.

1. Burger Palace had earnings after taxes of \$900,000 in the year 2009 with 301,000 shares outstanding. On January 1, 2010, the firm issued 32,000 new shares. Because of the proceeds from these new shares and other operating improvements, earnings after taxes increased by 28 percent.
(a) Compute earnings per share for the year 2009. (Round your answer to 2 decimal places.
Earnings per share =\$2.99 (\$900,000/301,000 shares)

(b) Compute ...

#### Solution Summary

This solution illustrates how to compute a company's earnings per share and price/earnings ratio.

\$2.19

## Preferred stock/PE Ratio/earnings per share

1. Your younger sister, Linda, will start college in five years. She has just informed your parents that she wants to go to Hampton University, which will cost \$17,000 per year for four years (cost assumed to come at the end of each year). Anticipating Linda's ambitions, your parents started investing \$2,000 per year five years ago and will continue to do so for five more years. How much more will your parents have to invest each year for the next five years to have the necessary funds for Linda's education? Use 10 percent as the appropriate interest rate throughout this problem (for discounting or compounding).

2. Burger Queen can sell preferred stock for \$70 with an estimated flotation cost of \$2.50. It is anticipated that the preferred stock will pay \$6 per share in dividends.

a. Compute the cost of preferred stock for Burger Queen.
b. Do we need to make a tax adjustment for the issuing firm?

3. Lyle Communications had finally arrived at the point where it had sufficient excess cash flow of \$2.4 million to consider paying a dividend. It had 2 million shares outstanding and was considering paying a cash dividend of \$1.20 per share. The firm's total earnings were \$8 million providing \$4.00 in earnings per share. Lyle Communications stock traded in the market at \$64.00 per share

However, Liz Crocker, the chief financial officer, was not sure paying the cash dividend was the best route to go. She had recently read a number of articles in The Wall Street Journal about the advantages of stock repurchases and before she made a recommendation to the CEO and board of directors, she decided to do a number of calculations.

a. What is the firm's P/E ratio?
b. If the firm paid the cash dividend, what would be the firm's dividend yield and dividend payout ratio per share?
c. If a stockholder held 100 shares of stock and received the cash dividend, what would be the total value of his portfolio? (stock plus dividends)
d. Assume instead of paying the cash dividend, the firm used the \$2.4 million of excess funds to purchase shares at slightly over the current market value of \$64 at a price of \$65.20. How many shares could be repurchased? (round to the nearest share)
e. What would the new earnings per share be under the stock repurchase alternative? (round to three places to the right of the decimal point)
f. If the P/E ratio stayed the same under the stock repurchase alternative, what would be the stock value per share? If a stockholder owned 100 shares, what would now be the total value of his portfolio? (This answer should be approximately the same as answer c)

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