Question

An investor estimates that next​ year's sales for​ Dursley's Hotels,​ Inc., should amount to about

​$100100

million. The company has

4.94.9

million shares​ outstanding, generates a net profit margin of about

8.28.2​%,

and has a payout ratio of

4949​%.

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

24.224.2

times​ earnings).

d. The expected holding period return​ (latest stock​ price:

​$27.1327.13

per​ share).

Answer 1

(a)

Estimated sales 100000000

Net profit margin 8.20%

So, net profit = Sales * margin

100000000*8.2%= 8200000

So, estimated earnings next year is $8,200,000

(b)

Dividend payout ratio = 49%

So, dividends = net profit * payout ratio

8200000*49%

4018000

No. of shares 4900000

Dividend per share= Total dividends/ no. of shares

4018000/4900000

0.82

So, dividend per share is $0.82

(c)

Earning per share = Total earnings / no. of shares

8200000/4900000

1.673469388

price per share = EPS * price earnings ratio

1.673469388*24.2

40.49795918

So, price per share is $40.50

(d) Holding period return formula = (Dividend + (Expected price in one year - Current price))/Current price

Current market price per share 27.13

(0.82+(40.50-27.13))/27.13

0.5229620046 Or 52.3%

So, expectd holding period return is 52.3%