Financial Learning Systems has 2.5 million shares of common stock outstanding and 100,000 shares of preferred stock.

Question:

Financial Learning Systems has 2.5 million shares of outstanding and 100,000 shares of preferred stock. (The preferred pays annual cash dividends of $5 a share, and the common pays annual cash dividends of 25 cents a share.) Last year, the company generated net profits (after taxes) of $6,850,000. The company’s shows total assets of $78 million, total liabilities of $32 million, and $5 million in preferred stock. The firm’s is currently trading in the market at $45 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 $3.75 and the P/E ratio stays where it is? What will happen if EPS drops to $1.50 and the P/E doesn’t change?
c. What will happen to the price of the stock if EPS rises to $3.75 and the P/E jumps to 25 times earnings?
d. What will happen if both EPS and the P/E ratio drop—to $1.50 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.
Common Stock
Common stock is an equity component that represents the worth of stock owned by the shareholders of the company. The common stock represents the par value of the shares outstanding at a balance sheet date. Public companies can trade their stocks on... Balance Sheet
Balance sheet is a statement of the financial position of a business that list all the assets, liabilities, and owner’s equity and shareholder’s equity at a particular point of time. A balance sheet is also called as a “statement of financial...