n 0a, ASsghment- Analysis of Financial Statements Green Caterpillar Garden Suppl

Question

n 0a, ASsghment- Analysis of Financial Statements Green Caterpillar Garden Supplies Inc. just reported earnings after tax (also called net income) of $8,500,000 and a current stock price of $12.00 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 2,000,000 new shares of stock (raising its shares outstanding from 5,500,000 to 7,500,000). 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? (Round any P/E ratio calculation to four decimal places). O $10.99 per share O $12.00 per share O $8.24 per share O $13.74 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 $16,485,000. Given this information, Green Caterpillar's market-to-book (M/B) ratio is Can a company's shares exhibit a negative P/E ratio? O No O Yes Which of the following statements is true about market value ratios? O Companies with high research and development (R&D) expenses tend to have high P/E ratios. O Companies with high research and development (R&D) expenses tend to have low P/E ratios

Explanation / Answer

Present P/E Ratio = Price/ EPS

= 12/ (8500000/5500000)

= 7.7647

After 1 year, EPS = Profits after tax/ Outstanding shares

= 8500000*125%/ 7500000

=1.41667

With same P/E Ratio price = 7.7647*1.41667 = $10.99 per share

2: Market to book ratio = market price of share/book value

= 48.36* 7500000/ 16485000

=22

3: Yes

If the companyis having losses, it will have negative P/E Ratio

4: First statement is true

Companies with high R&D will have low EPS. Due to denominator being low, the P/E Ratio will be high

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