Financial Learning Systems has 2.5 million shares of common stock outstanding and 100,000 shares of preferred stock. (The preferred pays annual cash dividends of RM5 a share, and the common pays annual cash dividends of 25 cents a share). Last year, the company generated net profits (after taxes) of RM6,850,000. The companys balance sheet shows total assets of RM78 million, total liabilities of RM32 million, and RM5 million in preferred stock. The firms common stock is currently trading in the market at RM45 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 RM3.75 and the P/E ratio stays where it is? What will happen if EPS drops to RM1.50 and the P/E ratio doesnt change?

c. What will happen to the price of the stock if EPS rises to RM3.75 and the P/E ratio jumps to 25 times earnings?

d. What will happen if both EPS and the P/E ratio drop-to RM1.50 and 10 times earnings, respectively?

e. Comment on the effect that EPS and the P/E ratio have on the market price of the stock.