Consider the case of Cold Goose Metal Works Inc.: Cold Goose Metal Works Inc. ju
ID: 2613884 • Letter: C
Question
Consider the case of Cold Goose Metal Works Inc.: Cold Goose Metal Works Inc. just reported earnings after tax (also called net income) of $95,000,000, and a current stock price of $31.25 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 Cold Goose'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 $25.89 per share $31.25 per share O $19.42 per share O $32.36 per share One year later, Cold Goose's shares are trading at $52.08 per share, and the company reports the value of its total common equity as $42,977,400. Given this information, Cold Goose'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 Low P/E ratios could mean that the company has a great deal of uncertainty in its future earnings. O High P/E ratios could mean that the company has a great deal of uncertainty in its future earnings.Explanation / Answer
Net Income = 95,000,000, No of Shares = 5,500,000
Earnings per share = 95,000,000/5,500,000 = 17.2727
P/E = Price/Share/( Earnings/share) = 31.25/17.2727 = 1.8092
New Net Income = 95,000,000 * ( 1+25%) = 118,750,000
New Shares = 8,300,000
New Earnings per Share = 118750000/8300000 = 14.3072
New Share price = (P/E)* EPS = 1.8092 * 14.3072= 25.89/share
Total Market Value = Share Price * no of shares = 25.89 * 8,300,000 = 214,887,000
M/B = Total Market Value / Book Value = 214,887,000/42,977,400 = 5
Yes it is possible to have negative P/E ratio when earnings are negative . Such companies should be avoided
Low P/E means could mean greater uncertainty in future earnings (True) because the market has assigned low price because it expects future earnings to be volatile or low. Hence they will buy less of such stock and the price per share will fall.
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