Question

Financial Learning Systems has 2.9 million shares of common stock outstanding and 61,410 shares of preferred stock.​ (The preferred pays annual cash dividends of ​$4.46 a​ share, and the common pays annual cash dividends of 19 cents a​ share.) Last​ year, the company generated net profit​ (after taxes) of $5,809,735. The​ company's balance sheet shows total assets of ​$72 ​million, total liabilities of $26 ​million, and $5 million in preferred stock. The​ firm's common stock is currently trading in the market at ​$48.62 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 $2.76 and the​ P/E ratio stays where it​ is? What will happen if EPS drops to $1.04

and the​ P/E doesn't​ change?

c. What will happen to the price of the stock if EPS rises to ​$2.76 and the​ P/E jumps to 36.1 times​ earnings?

d. What will happen if both EPS and the​ P/E ratio drop—to ​$1.04 and 14.3 times​ earnings, respectively?

e. Comment on the effect that EPS and the​ P/E ratio have on the market price of the stock.

Answer 1