Question
Financial Learning Systems has 2.6 million shares of common stock outstanding and 85,546 shares of preferred stock. (The preferred pays annual cash dividends of $5.35
Financial Learning Systems has 2.6 million shares of common stock outstanding and 85,546 shares of preferred stock. (The preferred pays annual cash dividends of $5.35 a share, and the common pays annual cash dividends of 28 cents a share.) Last year, the company generated net profit (after taxes) of $6,052,956. Thecompany's balance sheet shows total assets of $71 million, total liabilities of $27 million, and $4 million in preferred stock. The firm's common stock is currently trading in the market at $42.27 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 $3.08 and the P/E ratio stays where it is? What will happen if EPS drops to $1.35 and the P/E doesn'tchange?
c. What will happen to the price of the stock if EPS rises to $3.08 and the P/E jumps to 26.9 times earnings?
d. What will happen if both EPS and the P/E ratio dropto $1.35 and 10.6 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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