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Market value ratios

Ratios are mostly calculated using data drawn from the financial statements of a firm. However, another group of ratios, called market-based ratios, relate to a firms observable market value, stock prices, and book values, integrating information from both the market and the firms financial statements.

Consider the case of Blue Hamster Manufacturing Inc.:

Blue Hamster Manufacturing Inc. just reported earnings after tax (also called net income) of 9,750,000, and a current stock price of 12.00 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 Blue Hamsters forecast turns out to be correct and its price-to-earnings (P/E) ratio does not change, what does the companys management expect its stock price to be one year from now? (For any EPS calculation, round to two decimal places, and use that value in future calculations. Round any P/E ratio calculation to four decimal places).

$9.83 per share

$12.00 per share

$7.37 per share

$12.29 per share

One year later, Blue Hamsters shares are trading at 55.8 per share, and the company reports the value of its total common equity as 16,514,400. Given this information, Blue Hamsters market-to-book (M/B) ratio is 28.32 x .

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

No

Yes

Which of the following statements is true about market value ratios?

O Low P/E ratios could mean that the company has a great deal of uncertainty in its future earnings.

O High P/E ratios could mean that the company has a great deal of uncertainty in its future earnings.