Consider the case of Niagara Corp.: lingual Corp. just reported a net income of

Question

Consider the case of Niagara Corp.: lingual Corp. just reported a net income of $95, 000, 000, and its current stock price is $34.00 per share Niagara Corp. is forecasting an increase of 25% for its net 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 Niagara Corp.'s forecast turns out to be correct and its price-to-earrings (P/E) ratio does not change, what does Natural Corp. expel its stock price to be one year from now? $28.17 $34.00 $21.13 $35.21 Can a company's stock have a negative P/E ratio?

Explanation / Answer

1. Calculation of next year's stock price

Earning Per Share

( Net income / No. of shares )

14.30

Market price Per Share

( P/E Ratio * EPS )

28.17

(14.30 * 1.97)

P/E Ratio

(MPS / EPS )

Hence the answer is $ 28.17

2. Market to Book Ratio = Market Price per share / Book value per share

= $40.57 / $ 5.634

= 7.20 Times

* Book value per share = Common stock value / No. of shares

= $46762200 / 8300000

= $ 5.634

3. Can a company's stock have a negative P/E Ratio: NO

4. The following statement is true :

Companies with high Research & Development expenses tend to have high P/E Ratio.

Please provide feedback.

Current Year Next Year

Earning Per Share

( Net income / No. of shares )

17.27

14.30

Market price Per Share

( P/E Ratio * EPS )

34

28.17

(14.30 * 1.97)

P/E Ratio

(MPS / EPS )

1.97 1.97

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