LOS d, (Part 1): Calculate underlying earnings given earnings per share (EPS) and nonrecurring items in the income statement.

Q1. Alpha Software (AS) recently reported a representative annual earnings per share (EPS) of $1.75, which included an extraordinary loss of $0.19 and an expense of $0.10 related to acquisition costs during the accounting period, neither of which are expected to recur. Given that the most recent share price is $65.00, what is a useful AS’s trailing price to earnings (P/E) for valuation purposes?

A)   37.14.

B)   31.86.

C)   44.52.

Q2. Glad Tidings Gifts (GTG) recently reported a representative annual earnings per share (EPS) of $2.25, which included an extraordinary loss of $0.17 and an expense of $0.12 related to acquisition costs during the accounting period, neither of which are expected to recur. Given that the most recent share price is $50.00, what is a useful GTG’s trailing price to earnings (P/E) for valuation purposes?

A)   22.22.

B)   25.51.

C)   19.69.

Q3. Underlying earnings may be defined as earnings:

A)   that include non-recurring components.

B)   that exclude non-recurring components.

C)   net of capital expenditures needed to keep the business productive.

LOS d, (Part 1): Calculate underlying earnings given earnings per share (EPS) and nonrecurring items in the income statement. fficeffice" />

Q1. Alpha Software (AS) recently reported a representative annual earnings per share (EPS) of $1.75, which included an extraordinary loss of $0.19 and an expense of $0.10 related to acquisition costs during the accounting period, neither of which are expected to recur. Given that the most recent share price is $65.00, what is a useful AS’s trailing price to earnings (P/E) for valuation purposes?

A)   37.14.

B)   31.86.

C)   44.52.

Correct answer is B)

Using an underlying earnings concept, an analyst would add back the temporary charges against earnings: $1.75 + $0.19 + $0.10 = $2.04. The resulting trailing P/E = 65.00 / 2.04 = 31.86.

Q2. Glad Tidings Gifts (GTG) recently reported a representative annual earnings per share (EPS) of $2.25, which included an extraordinary loss of $0.17 and an expense of $0.12 related to acquisition costs during the accounting period, neither of which are expected to recur. Given that the most recent share price is $50.00, what is a useful GTG’s trailing price to earnings (P/E) for valuation purposes?

A)   22.22.

B)   25.51.

C)   19.69.

Correct answer is C)       

Using an underlying earnings concept, an analyst would add back the temporary charges against earnings: $2.25 + $0.17 + $0.12 = $2.54. The resulting trailing P/E = 50.00 / 2.54 = 19.69.

Q3. Underlying earnings may be defined as earnings:

A)   that include non-recurring components.

B)   that exclude non-recurring components.

C)   net of capital expenditures needed to keep the business productive.

Correct answer is B)

Underlying earnings are earnings that exclude non-recurring items. They are also known as persistent, continuing, or core earnings.