An investor estimates that next? year\'s sales for? Dursley\'s Hotels Inc. shoul

Question

An investor estimates that next? year's sales for? Dursley's Hotels Inc. should amount to about $95 million. The company has 2.1 million shares? outstanding, generates a net profit margin of about 6.1% and has a payout ratio of 58?%. All figures are expected to hold for next year. Given this? information, compute the following.

a. Estimated net earnings for next year.

b. Next? year's dividends per share.

c. The expected price of the stock? (assuming the? P/E ratio is 27.4 times? earnings).

d. The expected holding period return? (latest stock? price: $60.71 per? share).

Explanation / Answer

a. Estimated net earnings for next year.

Net profit margin = 6.1%

Expected Sales = $95 mil

Net profit Margin = Net Income/Total Sales

Hence, Net Income = 6.1% * $95 mil = $5.795 mil

Earning per share = $5.795/2.1 = $2.76/share

b. Next? year's dividends per share.

Payout Ratio = 58%

Dividend Payout = Net Income * Payout Ratio

Dividiend payout = $5.795 * 58% = $3.36 mil

Dividend payout/share = $3.36 mil/2.1 mil = $1.60

c. The expected price of the stock? (assuming the? P/E ratio is 27.4 times? earnings).

Price per Share/Earnings per Share = 27.4

Price per Share = 27.4 * Earnings per share = 27.4 * 2.76 = $75.61

d. The expected holding period return? (latest stock? price: $60.71 per? share).

Holding Period Return = (Final Price - Initial Price + Dividend)/Initial Price

Holding Period return = (75.61 - 60.71 + 1.60)/60.71 = 27.18%

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