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  1. Sire,

    I thought 8400,000 is the total earning (i.e earning before interest and tax) and if so why would you add back the interest saved to the total earning which was supposed to deduct a less interest expense than before and a more tax amount than before.

    8400,000 less interest to be paid (20,000,000*0.08 = 1,600,000) = 6800000 less tax to be paid (6800,000 * 0.30 = 2,040,000) net income is 4760000

    • No. Unless specifically told differently, earnings are after interest and after tax.

      Here there is absolutely no doubt, because the $8,400,000 is equal to the 20M shares x the EPS of $0.42 per share, and EPS is always, without exception, calculated using earnings available for shareholders i.e after interest and after tax.

      (If you are in any doubt about EPS then do watch my free lectures – the lectures are a complete free course for Paper F9 and cover everything needed to be able to pass the exam well.)

  3. John,

    I’m guessing it’s quite unlikely that in reality the PE ratio would remain the same?

    Surely, as profits increase then so does EPS and thus the PE ratio changes unless of course the additional profit is paid in dividends meaning that MV changes and the PE increases?

    Thanks

    • The PE is really a measure of the expected future growth – a high PE suggest shareholders are expected high growth, a low PE suggests they expecting lower growth.

      If the company makes more profits then you would expect there to be a higher MV, unless the future expectations of growth were to change.

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