Question

Security analysts following the Witczak Corporation use a simplified income-statement method of forecasting. Assume that current sales are $30 million, and are expected to grow by 12% in year 1 and 2. The after-tax profit margin is projected at 8% in year 1, and 9.2% in year 2. The number of shares outstanding is anticipated to be 450,000 for year 1, and 500,000 for year 2. Calculate the projected earnings per share for the next two years

Answer 1

(i)

Current sales = $30,000,000

Sales growth rate = 12%

Hence, expected sales in year 1 = 30,000,000 x 112%

= $33,600,000

After tax profit margin in year 1 = 8%

Hence, after tax profit in year 1 = 33,600,000 x 8%

= $2,688,000

Number of outstanding shares in year 1 = 450,000

Earnings per share = After tax profit/Number of outstanding shares

Hence, earnings per share in year 1 = 2,688,000/450,000

= $5.97

(ii)

Expected sales in year 1 = $33,600,000

Sales growth rate = 12%

Hence, expected sales in year 2 = 33,600,000 x 112%

= $37,632,000

After tax profit margin in year 2 = 9.2%

Hence, after tax profit in year 2 = 37,632,000 x 9.2%

= $3,462,144

Number of outstanding shares in year 2 = 450,000

Earnings per share = After tax profit/Number of outstanding shares

Hence, earnings per share in year 2 = 3,462,144/500,000

= $6.92