Financial Learning Systems has 1.9 million shares of common stock outstanding and 84 comma 649 shares...

Financial Learning Systems has 1.9 million shares of common stock outstanding and 84 comma 649 shares of preferred stock. (The preferred pays annual cash dividends of $4.67 a share, and the common pays annual cash dividends of 28 cents a share.) Last year, the company generated net profit (after taxes) of $ 6 comma 483 comma 362. The company's balance sheet shows total assets of $70 million, total liabilities of $ 30 million, and $ 5 million in preferred stock. The firm's common stock is currently trading in the market at $38.92 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 $4.67 and the P/E ratio stays where it is? What will happen if EPS drops to $1.81 and the P/E doesn't change?

c. What will happen to the price of the stock if EPS rises to $4.67 and the P/E jumps to 16.9 times earnings?

d. What will happen if both EPS and the P/E ratio drop-to $1.81 and 7.3 times earnings, respectively?

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

Expert Solution

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