Question

Assignment 04 - Analysis of Financial Statements 6. Market value ratios Aa Aa 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 $9,750,000, and a current stock price of $39.50 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 2,900,000 new shares of stock (raising its shares outstanding from 5,500,000 to 8,400,000). If Green Caterpillar's forecast turns out to be correct and its price-to-earnings (P/E) ratio does not change, what does the company's management expect its stock price to be one year from now? (Note: Round any EPS calculations to two decimal places, and round any P/E ratio calculation to four decimal places.) $32.36 per share $39.50 per share O $24.27 per share $40.45 per share One year later, Green Caterpillar's shares are trading at $53.32 per share, and the company reports the value of its total common equity as $54,364,800. Given this information, Green Caterpillar's market-to-book (M/B) ratio is

Answer 1

1	Price Earning Ratio = Price per share / Earning per share
	Calulate curent PE Ratio
		= 39.5 / (9750000/5500000)
		22.28
	Calculate company's share price if company’s forcast turns to be correct:
	Price Earning Ratio = Price per share / Earning per share
	22.28 = Price Per share / (9750000*1.25 / 8400000)
	Price per share = 22.28 * (9750000 *1.25/8400000)
		32.36
	Option 1 is correct
2	Market to Book ratio = Market price per share / Book value per share
			= 53.32 / (54364800 / 8400000)
			8.24
3	Yes, a company may have negative P/E Ratio. It could happen with a lose making company.
4	OPTION B: Company having high R&d expense have low P/E Ratio due to lower reporting earnings.