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Calculation of Share Ratios

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P7.9-Financial Learning Systems has 2.6 million shares of common stock outstanding and 74,908 shares of preferred stock. (The preferred pays annual cash dividends of $5.63 a share, and the common pays annual cash dividends of 33 cents a share.) Last year, the company generated net profit (after taxes) of $ 6,709, 324.
The company's balance sheet shows total assets of $71 million, total liabilities of $ 29 million, and $ 4 million in preferred stock. The firm's common stock is currently trading in the market at $53.59 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 $3.65 and the P/E ratio stays where it is? What will happen if EPS drops to $1.54 and the P/E doesn't change?

c. What will happen to the price of the stock if EPS rises to $3.65 and the P/E jumps to 31.4 times earnings?

d. What will happen if both EPS and the P/E ratio drop long dash to $1.54 and 11.4 times earnings, respectively?

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

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Solution Summary

This excel solution shows step by step calculation of earnings per share (EPS) under different scenarios and how changes in EPS and P/E ratios affect the market price per share.