Ch. 3: HW2 Blue Hamster Manufacturing Inc. just reported earnings after tax (als
ID: 2815921 • Letter: C
Question
Ch. 3: HW2 Blue Hamster Manufacturing Inc. just reported earnings after tax (also called net income) of $8,500,000, and a current stock year, but it also expects it will have to issue 2,000,00 new shares of stock (raising its shares outstanding from price of $39.50 per share. The company is forecasting an increase of 25% for its after-tax income next 5,500,000 to 7,500,000). If Blue Hamster's forecast the company's management expect its stock price to be one year from now? (Round any P/E ratio calculation to four decimal places). turns out to be correct and its price-to-earnings (P/E) ratio does not change, what does O $36.19 per share O $39.50 per share O $27.14 per share $45.24 per share One year later, Blue Hamster's shares are trading at $50.84 per share, and the company reports the value of its total common equity as $54,285,000. Gven this information, Blue Hamster'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 low P/E ratios. O Companies with high research and development (R&D) expenses tend to have high P/E ratios.Explanation / Answer
1) Existing earnings per share (EPS) = Net income / no. of shares = $8,500,000 / 5,500,000 = $1.54545454545
PE ratio = existing share price / existing EPS = $39.50 / $1.54545454545 = 25.5588235294
Expected EPS next year = Expected net income / Expected no. of shares
or, Expected EPS = ($8,500,000 + 25%) / 7,500,000 = $1.41666666666
Share price one year from now = Expected EPS x PE ratio = $1.41666666666 x 25.5588235294 = $36.19
2) market value = market price x no. of shares = $50.84 x 7,500,000 = $381,300,000
Market-to-book ratio = market value / book values = $381,300,000 / $54,284,000 = 7.02
3) Yes, their can be a negative PE ratio as their can be a negative EPS.
4) Companies with high research and development (R&D) expenses tend to have high P/E ratios.