Question

6. Market value ratios Ratios are mostly calculated using data drawn from the financial statements of a firm. However, another group of ratios, called market value ratios, relate to a firm's observable market value, stock prices, and book values, integrating information from both the market and the firm's financial statements Consider the case of Blue Hamster Manufacturing Inc.: Blue Hamster Manufacturing Inc. Just reported earnings after tax (also called net income) of $8,000,000 and a current stock price of $17.50 per share. The company is forecasting an increase of 25% for its after-tax income next year, but it also expects it will have to issue 1,500,000 new shares of stock (raising its shares outstanding from 5,500,000 to 7,000,000) If Blue Hamster's forecast turns out to be correct and its price/earnings (P/E) ratio does not change, what does the company's management expect its stock price to be one year from now? (Round any P/E ratio calculation to four decimal places.) $17.26 per share $17.50 per share $12.95 per share $21.58 per share

Answer 1

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vel 4* 02:35 ENG 24-02-202024 1C228 HV HW IB IC 228 HX HY CURRENT EPS = HZ I A NET INCOME/ NO OF SHARES 8000000/5500000 = 229 1.45 ROUNDED TO 2 DECIMALS 230 231 232 CURRENT P/E = MARKET PRICE/EPS 17.5/1.45 = 12.0690 ROUNDED TO 2 DECIMALS 233 NEXT YEAR NET INCOME = 234 235 8000000*(1+0.25) 10000000 NEXT YEAR EPS = 237 238 1.43 [10000000/7000000] 240 AS P/E REMAINS SAME MARKET PRICE = P/E X NEXT YEAR EPS= MARKET PRICE = 17.26 [ = 12.0690 X 1.43 ] MARKET PRICE = 17.26 ANS 243 245 246 ONE YEAR LATER TOTAL NO OF SHARES = MARKET PRICE TOTAL MARKET VALUE = 7000000 A 52.08 B 364560000 A*B 247 248 BOOK VALUE 24164000 249 250 251 ANS ABNORMAL deberk MARKET TO BOOK RATIO = MARGIN MONEY marginal tax 15.09 (364560000/24164000] PB ROPI APV ROSS price quote | LEVERAGED BUY ... EV PE EPS DIV SWAP Sheet2 distress ... :

vel 4* 02:35 ENG 24-02-202024 HW258 fix X HV HW HX HY HZ IA IB IC 250 251 252 ANS MARKET TO BOOK RATIO = 15.09 (364560000/24164000] FILL IN THE BLANK YES 254 255 TRUE STATEMENT COMPANIES WITH HIGH RESEARCH & DEVELOPMENT EXPENSES TEND TO HAVE HIGHER P/E 256 257 258 259 260 261 262 263 264 265 266 267 268 269 270 271 272 273 ... EV PE EPS DIV ABNORMAL deberk MARGIN MONEY marginal tax PB ROPI APV ROSS price quote | LEVERAGED BUY SWAP Sheet2 distress ... :