Question

One hundred million shares of stock have been outstanding for the period. Prospec’s share price in 20X7, 20X8, and 20X9 was $39.27, $26.10, and $11.55. Calculate the firm's Earnings Per Share (EPS), and its Price Earnings Ratio (P/E). What's happening to the P/E? To what things are investors likely to be reacting? How would a slowdown in personal computer sales affect your reasoning?

	20X7	20X8	20X8
Sales	$1,578	$2,106	$3,265
COGS	631	906	1,502
Gross Margin	$   947	$1,200	$1,763
Expenses
Marketing	$316	$495	$882
R & D	158	211	327
Admin.	126	179	294
Total Expenses	$   600	$   885	$1,503
EBIT	$347	$315	$260
Interest	63	95	143
EBT	$284	$220	$117
Tax	97	75	40
EAT	$187	$145	$ 77

	20X7	20X8	20X9
ASSETS
Cash	$     30	$     40	$     62
Accounts Receivable	175	351	590
Inventory	90	151	300
Current Assets	$    295	$    542	$    952
Fixed Assets
Gross	$1,565	$2,373	$2,718
Accum. Depreciation	(610)	(860)	(1,135)
Net	$   955	$1,513	$1,583
Total Assets	$1,250	$2,055	$2,535
LIABILITIES
Accounts Payable	$56	$81	$134
Accruals	15	20	30
Current Liabilities	$71	$101	$164
Capital
Long-Term Debt	$630	$1,260	$1,600
Equity	549	694	771
Total Liability & Equity	$1,250	$2,055	$2,535

Answer 1

Assuming all the data in the table is in millions

Earnings per share = EAT/No of shares

2017=187/100=1.87

2018=145/100=1.45

2019=77/100=0.77

P/E= Price per share/ EPS

2017=39.27/1.87=21

2018=26.10=1.45=18

2019=11.55/0.77=15

What is happening to the P/E?

P/E is decreasing that indicates that investors are already factoring in the decrease in net profit.

To what things are investors likely to be reacting?

Investors are reacting due to below reasons:

1. The substantial increase in Debt in the last two years.

2. The decrease in the Gross Margin.

3. The substantial increase in Admin cost from 179 in 2018 to 294 in 2019.

How would a slowdown in personal computer sales affect your reasoning?

It will further decrease the sales and in turn, will affect revenues negatively.

The investor will further sell the shares.