Question

An investor estimates that next​ year's sales for​ Dursley's Hotels Inc. should amount to about ​$100 million. The company has 5 million shares​ outstanding, generates a net profit margin of about 10​%, and has a payout ratio of 50​%. 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 24.5 times​ earnings).
d. The expected holding period return​ (latest stock​ price: ​$40 per​ share).

Answer 1

(a) $10 million

(b) $1 per share

(c) $49

(d) 25 %

Step-by-step explanation:

(a) Estimated net earnings for next year.

Sales next year = $100 million

Net profit margin = 10%

Net profit margin = Net Income ÷ Sales

Net Income = 10% × $100 million

= $10 mil lion

(b) Next year's dividends per share.

Dividend payout = Dividends paid ÷ Net Income

= 50%

Dividends paid = $10 × 50%

= $5 mil lion

Per share dividend = Dividend paid ÷ Shares outstanding

= $5 million ÷ 5 million

= $1 per share

(c) The expected price of the stock (assuming the P/E ratio is 24.5 times earnings).

Earnings per share:

= Net income ÷ shares outstanding

= $10 million ÷ 5 million

= $2 per share

P/E Ratio = Price per share ÷ Earnings per share

Price per share = $2 × 24.5

= $49

(d) The expected holding period return (latest stock price: $40 per share).

= (Final price - Initial price + Dividend) ÷Initial Price

= ($49 - $40 + $1) ÷ $40

= 25%