1. Atlantic Northern Inc. just reported a net income of $12,000,000, and its current stock price is $31.25 per share. Atlantic Northern is forecasting an increase of 25% for its net 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 shares to 7,000,000 shares).
If Atlantic Northern’s forecast turns out to be correct and its price-to-earnings (P/E) ratio does not change, what does management expect its stock price to be one year from now? (Hint: If you choose to compute the firm’s price/earnings ratio, round its value to four decimal places.)
a) $30.68 per share
b) $31.25 per share
c) $23.01 per share
d) $38.35 per share
2. One year later, Atlantic Northern Inc.’s stock is trading at $42.75, and the company reports its common equity value as $42,952,000. What is Atlantic Northern Inc.’s market-to-book(M/B) ratio?
3. Is it possible for a company to have a negative EPS and thus a negative P/E ratio? ( Yes or no)
4. Which of the following statements is true about market value ratios?
a) Companies with high research and development (R&D) expenses tend to have low P/E ratios.
b) Companies with high research and development (R&D) expenses tend to have high P/E ratios.