Reference no: EM132018155
Financial Learning Systems has 2.62 million shares of common stock outstanding and 89,032 shares of preferred stock. (The preferred pay annual cash dividends of $5.02 a share, and the common pays annual cash dividends of 30 cents a share.) Last year, the company generated net profit (after taxes) of $6,720,605. The company's balance sheet shows total assets of $82 million, total liabilities of $ 36 million, and $6 million in preferred stock. The firm's common stock is currently trading in the market at $42.69 a share.
a. Given the preceding information, find the EPS, P/E ratio, and book value per share.
b. What will happen to the price of the stock if EPS rises to $3.46 and the P/E ratio stays where it is? What will happen if EPS drops to $1.46 and the P/E doesn't change?
c. What will happen to the price of the stock if EPS rise to $3.46 and the P/E jumps to 24.4 times earnings?
d. What will happen if both EPS and the P/E ratio drop—to $1.46 and 10.7 times earnings, respectively?
e. Comment on the effect that EPS and the P/E ratio have on the market price of the stock.
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The firm's EPS is $___. (Round to two decimal places.)
The firm's P/E ratio is ___.(Round to two decimal places.)
The firm's book value per share is $___.(Round to the nearest cent.)
b. If EPS rises to $3.46 and the P/E ratio stays where it is, the new price is $___. (Round to the nearest cent.)
If EPS drops to $1.46 and the P/E doesn't change, the new price is $___. (Round to the nearest cent.)
c. If EPS rises to $3.46 and the P/E jumps to 24.4 times earnings, the new price is $___.(Round to the nearest cent.)
d. If both EPS and the P/E ratio drop—to $1.46 and 10.7 times earnings, respectively, the new price is $___. (Round to the nearest cent.)
e. Comment on the effect that EPS and the P/E ratio have on the market price of the stock. (Select the best answer below.)
A. When the EPS rise (drop) for a given P/E multiple, the market price of the stock increases (decreases).
B. When the EPS rise (drop) for a given P/E multiple, the market price of the stock decreases (increases).
Another:
(Select the best answer below.)
A. When both the EPS and P/E multiple rise (drop), the market price of the stock decreases (increases).
B. When both the EPS and P/E multiple rise (drop), the market price of the stock increases (decreases) to a greater degree.
C. When both the EPS and P/E multiple rise (drop), the market price of the stock decreases (increases) to a greater degree.