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 firm$$s observable market value, stock prices, and book values, integrating information from both the market and the firm$$s financial statements.

Consider the case of Green Caterpillar Garden Supplies Inc.:

Green Caterpillar Garden Supplies Inc. just reported earnings after tax $($also called net income$)$ of $$8,500,000,$ and a current stock price of $$34\mathrm{.}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 $2,000,000$ new shares of stock $($raising its shares outstanding from $5,500,000$ to $7,500,000).$

If Green Caterpillar$$s forecast turns out to be correct and its price$-$to$-$earnings $($P$/$E$)$ ratio does not change, what does the company$$s management expect its stock price to be one year from now? $($Note: Round intermediate calculations to four decimal places. Round the expected stock price to two decimal places.$)$

$$31\mathrm{.}17$ per share

$$34$ per share

$$23\mathrm{.}38$ per share

$$38\mathrm{.}96$ per share

One year later, Green Caterpillar$$s shares are trading at $$48\mathrm{.}36$ per share, and the company reports the value of its total common equity as $$46,755,000.$ Given this information, Green Caterpillar$$s market$-$to$-$book $($M$/$B$)$ ratio is $.($Note: Do not round intermediate calculations.$)$

Can a company$$s shares exhibit a negative P$/$E ratio?

No

Yes

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

Companies with high research and development $($R&D$)$ expenses tend to have high P$/$E ratios.

Companies with high research and development $($R&D$)$ expenses tend to have low P$/$E ratios.