Question #28
Reading: Reading 13 Integration of Financial Statement Analysis Techniques
PDF File: Reading 13 Integration of Financial Statement Analysis Techniques.pdf
Page: 15
Status: Correct
Correct Answer: A
Question
An investor relations spokesperson for the Square Door Corporation was quoted as saying that Square Door shares were a bargain, selling at a price-to-earnings (P/E) ratio of 12, relative to the S&P 500 average P/E of 15.3. The financial statements reported net earnings of $126 million, or $4.00 per share. The notes to the financial statements included a statement that income for the year included a $31.5 million (after-tax) gain from the reclassification of certain assets from its investment portfolio to its trading portfolio. What would be the normalized P/E?
Answer Choices:
A. 13
B. 16
C. 15
Explanation
Since the P/E ratio was 12 and EPS was $4, the price of the stock was $48 (12 ×
4). After removing the nonrecurring gain, earnings will be $94.5 million (126 − 31.5). We
know the number of shares is 31.5 million (126 Million ÷ 4). So the new EPS number is 3
(94.5 million ÷ 31.5 million) and new P/E ratio is 16 (48 ÷ 3).