Ratios are mostly calculated using data drawn from the financial statements of a
ID: 2336117 • Letter: R
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 Blue Hamster Manufacturing Inc. Blue Hamster Manufacturing Inc. just reported earnings after tax (also called net income) of $95,000,000, 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 2,800,000 new shares of stock (raising its shares outstanding from 5,500,000 to 8,300,000) If Blue Hamster'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? (Round any P/E ratio calculation to four decimal places) $32.73 per share $39.50 per share $24.55 per share $40.91 per share One year later, Blue Hamster's shares are trading at $47.12 per share, and the company reports the value of its total common equity as $54,331,800. Given this information, Blue Hamster'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? O No O Yes 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 earningsExplanation / Answer
current level of net income
95000000
no of share outstanding
5500000
EPS = net income/no of shares
17.272727
PE ratio = market price/EPS
39.5/17.27
2.287
changed level of net income
current level*(1+growth rate)
118750000
no of share outstanding
8300000
EPS = net income/no of shares
14.30723
Market price = eps*pe ratio
2.287*14.31
32.73
total common equity
54331800
no of shares
8300000
book value per share
6.55
market price per share
47.12
market to book value ratio
market price/book value per share = 47.12/6.55
7.20
Yes
B- low PE ratio could mean that the company has a great deal of uncertainty in its future earnings
current level of net income
95000000
no of share outstanding
5500000
EPS = net income/no of shares
17.272727
PE ratio = market price/EPS
39.5/17.27
2.287
changed level of net income
current level*(1+growth rate)
118750000
no of share outstanding
8300000
EPS = net income/no of shares
14.30723
Market price = eps*pe ratio
2.287*14.31
32.73
total common equity
54331800
no of shares
8300000
book value per share
6.55
market price per share
47.12
market to book value ratio
market price/book value per share = 47.12/6.55
7.20
Yes
B- low PE ratio could mean that the company has a great deal of uncertainty in its future earnings
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