Question

Cute Camel Woodcraft Company just reported earnings after tax (also called net income) of $9,750,000 and a current stock price of $39.50 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 2,900,000 new shares of stock (raising its shares outstanding from 5,500,000 to 8,400,000)

If Cute Camel'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?
(Note: Round any EPS calculations to two decimal places, and round any P/E ratio calculation to four decimal places.)
a. $32.36 per share
b. $39.50 per share
c. $24.27 per share
d. $40.45 per share
One year later, Cute Camel's shares are trading at $47.12 per share, and the company reports the value of its total common equity as $54,364,800. Given this information, Cute Camel's market-to-book (M/B) ratio is ____.
Is it possible for a company to exhibit a negative EPS and thus a negative P/E ratio?
a. No
b. Yes

Answer 1

Step-by-step explanation:

a)

earning per share = Net income / outstanding shares

= $9,750,000 / 5,500,000 = $1.77

price earning ratio = Current stock price \ earning per share

= $39.50 \ $1.77 = 22.32

new Earning per share = Net income / outstanding shares

= $9,750,000 * 125% / 8,400,000 = $1.45

the stock price after one year would be

= Price earning ratio * New earning per share = 22.32 * $1.45 = $32.36

b)

Market to book ratio = Market value/ book value

Market value = Share price * number of outstanding shares

= $47.12 * 8,400,000 shares = $395,808,000

book value is $54,364,800

M/B = $395,808,000 / $54,364,800 = 7.28 times

Is it possible for a company to exhibit a negative EPS and thus a negative P/E ratio?

Yes, if company is having losses