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A portfolio manager with an independent money management firm has been examining a stock market series and is trying to determine an appropriate EPS figure for the series. In her research, this portfolio manager has determined the following information:
1. Regressing sales for the series against Nominal GDP, the sales figure for the index has been estimated at: $19.85.
2. Analyzing capacity utilization rates, foreign competition, rates of inflation and unit labor costs, the operating profit margin for the series has been determined to be 31%.
3. Creating a time series based upon inputs such as levels of capital expenditures and PP&E turnover, next year's depreciation-per-share has been determined to be: $1.18.
4. Creating a time series based upon levels of debt outstanding and prevailing debt yields, the interest expense for next year is determined to be: $0.61 per share.
5. Coordinating his research with a legislative consultant, the corporate tax rate for this series has been estimated at: 34.77%.
Using this information, what is the EPS figure for this stock market series?
A. $4.03
B. None of these answers is correct.
C. The answer cannot be determined from the information provided. * $1.52
D. $2.85
E. $2.46
Answer: D
All of the necessary information has been provided in this example. To determine the EPS for a stock market series, the following steps are necessary:
Step 1: Estimate sales-per-share for the series:
Step 2: Estimate operating profit margin for the series
Step 3: Estimate the depreciation-per-share for next year
Step 4: Estimate the interest expense-per-share for the next year
Step 5: Estimate next year's corporate tax rate
Once these five steps have been completed, the calculation of EPS for a stock market series is found by the following:
EPS = [(Sales per share * Operating profit margin) - Depreciation-per-share - Interest Expense] * (1 - Corporate Tax Rate) The calculation of EPS for this stock market series is shown as follows: EPS = [($19.85 * 0.31) - $1.18 -
$0.61] * (1 - 0.3477) = $2.85

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