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 Green Caterpillar Garden Supplies Inc.: Green Caterpillar Garden Supplies Inc. just reported earnings after tax (also called net income) of $95,000,000 and a current stock price of $34.00 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 2,800,000 new shares of stock (raising its shares outstanding from 5,500,000 to 8,300,000). If Green Caterpillar'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.) $28.17 per share $34.00 per share $21.13 per share $35.21 per share One year later, Green Caterpillar's shares are trading at $48.36 per share, and the company reports the value of its total common equity as $46,762,200. Given this information, Green Caterpillar's market-to-book (M/B) ratio is Is it possible for a company to exhibit a negative EPS and thus a negative P/E ratio? Yes No Which of the following statements is true about market value ratios? High P/E ratios could mean that the company has a great deal of uncertainty in its future earnings. Low P/E ratios could mean that the company has a great deal of uncertainty in its future earnings. Grade It Now Save & Continue Continue without saving

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? v L 1 ENG 05:16 15-02-2020 E 26 HW356 - fi X HV HW HX HY HZIA IB IC I D CURRENT EPS = 355 356 357 358 359 NET INCOME/ NO OF SHARES 9500000/5500000 = 1.727273 CURRENT P/E = 360 MARKET PRICE/EPS 34/1.73 = 19.6842 361 NEXT YEAR NET INCOME = 362 363 9500000*(1+0.25) 11875000 NEXT YEAR EPS = 1.430723 [=11875000/8300000] 365 366 367 368 AS P/E REMAINS SAME MARKET PRICE = P/E X EPS= MARKET PRICE = 28.17 28.17 [19.6842 x 1.430723] 369 ANS 370 371 372 373 ONE YEAR LATER TOTAL NO OF SHARES = MARKET PRICE TOTAL MARKET VALUE = 8300000 A 48.36 B 401388000 A*B 374 375 376 BOOK VALUE 46762200 377 378 270 ANS MARKET TO BOOK RATIO = 8.58 [401388000/46762200) PB ROPI APV ROSS price quote EVA MVA ... EV PE EPS DIV ABNORMAL deberk MARGIN MONEY marginal tax LEVERAGED BUY SWAP Sheet ... :

| 0 = a = 3 3 4 5 ? v L 1 ENG 05:17 15-02-2020 26 IA388 HV HWHX HY HZIA IB IC I D 379 380 ANS YES can have negative P/E ANS SECOND OPTION IS: TRUE LOW P/E RATIO COULD MEAN THAT COMPANY HAS A GREAT DEAL OF UNCERTAINTY IN ITS FUTURE EARNINGS 382 383 384 385 386 387 388 389 390 391 392 394 395 396 397 398 399 400 401 402 ... EV PE EPS DIV ABNORMAL deberk MARGIN MONEY marginal tax PB ROPI APV ROSS price quote EVA MVA LEVERAGED BUY SWAP Sheet ... :