Question

Ratios are mostly calculated using data drawn from the financial statements of a firm. However, another group of ratios, called market-based 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 $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 2,800,000 new shares of stock (raising its shares outstanding from 5,500,000 to 8,300,000).

Answer 1

1.Original P/E ratio = Price Per share/(Earnings Per Price) = 17.50/(95,000,000/5,500,000) = 1.0132

New Price Per Share/(New Earnings Per Share) = 1.0132
New Price Per Share = 1.0132*(95,000,000*1.25)/(8,300,000) = 14.50

Option a is correct.

2. M/B ratio = 52.08/(24,070,000/830,000) = 17.96

3. Yes

4.Option b . High P/E ratio

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