Reference no: EM133578577

Question

How did crazy eddie document this on a general ledger If that company's management inflated its earnings by $1 million or $1 per share, it would report earnings of $2 million or $2 earnings per share. Assuming the P/E ratio remains at 30, if the earnings were now $2 per share, the price per share would increase to $60 (30 P/E x $2 earnings per share = $60 price per share). The company's market capitalization would increase by $30 million ($30 price per share x one million shares outstanding = $30 million). All things being equal, inflating earnings by only $1 million or $1 per share added $30 million to the company's market cap. Insiders can then pocket $30 per share of ill-gotten gains. Before Crazy Eddie went public, all of the shares were owned by the Antar family. If the Antar family still owned one million shares of stock trading at a P/E of 30, and if we artificially inflated earnings by one million dollars or $1 per share, our collective wealth would have increased by $30 million. Thus, this small one million dollar deception created $30 million of fictitious wealth! By comparison, skimming one million dollars from cash.