Ratios are mostly calculated using data drawn from the financialstatements of a firm. However, another group of ratios, calledmarket value ratios, relate to a firm’s observable market value,stock prices, and book values, integrating information from boththe market and the firm’s financial statements.

Consider the case of Green Caterpillar Garden Supplies Inc.:

Green Caterpillar Garden Supplies Inc. just reported earningsafter tax (also called net income) of $9,250,000 and a currentstock price of $12.00 per share. The company is forecasting anincrease of 25% for its after-tax income next year, but it alsoexpects it will have to issue 3,000,000 new shares of stock(raising its shares outstanding from 5,500,000 to 8,500,000).

If Green Caterpillar’s forecast turns out to be correct and itsprice/earnings (P/E) ratio does not change, what does the company’smanagement expect its stock price to be one year from now? (Roundany P/E ratio calculation to four decimal places.)

$9.71 per share

$12.00 per share

$7.28 per share

$12.14 per share

One year later, Green Caterpillar’s shares are trading at $55.80per share, and the company reports the value of its total commonequity as $16,507,000. Given this information, Green Caterpillar’smarket-to-book (M/B) ratio is__.

Can a company’s shares exhibit a negative P/E ratio?

Yes

No

Which of the following statements is true about market valueratios?

Companies with high research and development (R&D) expensestend to have low P/E ratios.

Companies with high research and development (R&D) expensestend to have high P/E ratios.