Question

As of February 2008, you are researching Jonash International, a hypothetical company subject to cyclical demand...

As of February 2008, you are researching Jonash International, a hypothetical company
subject to cyclical demand for its services. Jonash shares closed at $57.98 on 2 February
2007. You believe the 2003–2006 period reasonably captures average profitability:

Measure

2007

2006

2005

2004

2003

EPS

E$3.03

$1.45

$0.23

$2.13

$2.55

BV per share

E$19.20

$16.21

$14.52

$13.17

$11.84

ROE

E16.0%

8.9%

1.6%

16.3%

21.8%


Define normalized EPS.

Homework Answers

Answer #1

Normalized EPS is the level of earnings per share that the company could currently achieve under midcyclical conditions.

In other words normalised EPS will remove the fluctuations and provide an estimate of the earnings that the company would ordinarily generate in a typical year.

Calculate a normalized EPS for Jonash based on the historical average EPS (2003-2006 this years capture average profitability )

($1.45+$0.23+$2.13+$2.55)/4 = $1.59

P/E based on normalised EPS = market price/ normalised EPS

=57.98/1.59 = 36.47

Calculate a normalized EPS for Jonash based on the method of average ROE

Average ROE = (.089+.016+.163+.218)/4 =.1215

EPS = BV per share * ROE

Normalised EPS =19.20*.1215 = 2.33

P/E = 57.98/2.33 = 24.88

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