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 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 $$95,000,000,$ and a current stock

price of $$28\mathrm{.}50$ 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 $2,800,000$ new shares of stock $($raising its shares outstanding from $5,500,000$ to $8,300,000).$

If Green Caterpillar's forecast turns out to be correct and its price$-$to$-$earnings $(\frac{P}{E})$ 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.$)$

$$23\mathrm{.}61$ per share

$$28$ per share

$$17\mathrm{.}71$ per share

$$29\mathrm{.}51$ per share

One year later, Green Caterpillar's shares are trading at $$54\mathrm{.}56$ per share, and the company reports the value of its total common equity as

$$39,192,600.$ Given this information, Green Caterpillar's market$-$to$-$book $($M$/$B$)$ ratio is

$.($Note: Do not round intermediate calculations.$)$

Is it possible for a company to exhibit a negative EPS and thus a negative $\frac{P}{E}$ 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 $\frac{P}{E}$ ratios.