7. 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).

Question #1 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? (Note: Round intermediate calculations to four decimal places. Round the expected stock price to two decimal places.)

A. $9.82 per share B. $12 per share C. $7.37 per share D. $12.28 per share

Question #2 One year later, Blue Hamsters shares are trading at $55.80 per share, and the company reports the value of its total common equity as $16,497,600. Given this information, Blue Hamsters market-to-book (M/B) ratio is _______ . (Note: Do not round intermediate calculations.) A. 42.62 x B. 28.41 x C. 1.22 x D. 68.19 x

Question #3 Is it possible for a company to exhibit a negative EPS and thus a negative P/E ratio?

A. No B. Yes

Question #4 Which of the following statements is true about market value ratios?

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