Cute Camel Woodcraft Company just reported earnings after tax (also called net i

Question

Cute Camel Woodcraft Company just reported earnings after tax (also called net income) of $8,000,000, and a current stock price of $25.75 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 1,500,000 new shares of stock (raising its shares outstanding from 5,500,000 to 7,000,000) If Cute Camel's forecast turns out to be correct and its price-to-earnings (P/E) ratio does not change, what does the company's management expect its stock price to be one year from now? (Round any P/E ratio calculation to four decimal places). $25.22 per share $25.75 per share O $18.92 per share $31.53 per share One year later, Cute Camel's shares are trading at $49.60 per share, and the company reports the value of its total common equity as $35,308,000. Given this information, Cute Camel's market-to-book (M/B) ratio is Can a company's shares exhibit a negative P/E ratio? O No O Yes Which of the following statements is true about market value ratios? O Companies with high research and development (R&D) expenses tend to have low P/E ratios O Companies with high research and development (R&D) expenses tend to have high P/E ratios.

Explanation / Answer

a) current year price earning ratio = 25.75*5500000/8000000 17.7 current price earning = 17.70 B)next year earning = 8000000*(1+25%) 10000000 if PE ratio remains constant nxt year then share price nxt year is 10000000*17.70/7000000 = 25.22 per share option A is correct C) market to book value after one year = (7000000*49.60)/35308000 = 9.833 D) because of negative earing of the company negative PE ratio is possible hence YES PE ratio negative is possible E) Option "B" is correct company who spend high research and development expenses to have high P/E ratios

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