Question

Q3. You are given the following estimated per share data related to the S&P Industrials Index for the year 2004: Sales $1,020.00

Depreciation 45.00
Interest expense $18.00
a. You are also informed that the estimated operating profit margin is 0.152 and the tax rate is 32 percent.
b. Compute the estimated EPS for 2004.
c. Assume that a member of the research committee for your firm feels that it is important to consider a range of operating profit margin (OPM) estimates.

Therefore, you are asked to derive both optimistic and pessimistic EPS estimates using 0.149 and 0.155 for the OPM and holding everything else constant.​

Answer 1

The estimated EPS(Earning per Share) for 2004 is -0.044.

To calculate the estimated EPS for 2004, use the formula: EPS = (Operating Profit × (1 - Tax Rate) - Interest Expense - Depreciation) / Sales. The estimated EPS for 2004 is approximately -0.044. To derive optimistic and pessimistic EPS estimates, use different operating profit margins within a given range and hold everything else constant.

To calculate the estimated EPS for 2004, we need to use the formula:

EPS = (Operating Profit × (1 - Tax Rate) - Interest Expense - Depreciation) / Sales

Using the given data, we can calculate:

EPS = (0.152 × (1 - 0.32) - 18 - 45) / 1020

EPS = (0.10704 - 18 - 45) / 1020

EPS = -0.04396

The estimated EPS for 2004 is -0.044.

To derive the optimistic and pessimistic EPS estimates, we can use the range of operating profit margins given (0.149 and 0.155) and hold everything else constant.

For the optimistic EPS estimate:

EPS = (0.155 × (1 - 0.32) - 18 - 45) / 1020

EPS = (0.1088 - 18 - 45) / 1020

EPS = -0.04321

For the pessimistic EPS estimate:

EPS = (0.149 × (1 - 0.32) - 18 - 45) / 1020

EPS = (0.10456 - 18 - 45) / 1020

EPS = -0.04424