An analyst with Smith, Kleen, & Beetchnutty is trying to determine an earnings per share (EPS) estimate for a health-care index, and has gathered the following information:
Sales per share: $600 -
Next year's operating profit margin: 38%
Next year's depreciation per share: $95
Next year's interest expense: $81
Next year's common stock dividend: $1.50
Next year's corporate tax rate: 35%
Using this information, what is the EPS figure for this stock market series?
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A. B. C. D. E. F.Explanation
The estimation of EPS for a stock market series involves five steps. Specifically, to determine an estimate of EPS for a stock market series, it is necessary to:
Estimate the sales per share -
Estimate next year's operating profit (EBIDT), or operating profit margin
Estimate next year's depreciation per share
Estimate next year's interest expense per share
Estimate next year's corporate tax rate
Once estimates for these components have been determined, they are put into the following equation:
EPS for a stock market series = {[(Sales per share * operating profit margin) - depreciation per share - interest expense per share] * (1 - corporate tax rate).
Imputing the given information into this equation will yield the following:
EPS for a stock market series = {[($600 * 0.38) - $95 - $81] * (1 - 0.35)} = $33.80
If you chose $128.80, remember that the depreciation figure is not added back to the EPS calculation. What we are looking at is an operating earnings after tax figure, not a cash-based figure.
If you chose $32.83, remember that common stock dividends are not incorporated into the EPS figure, only interest payments on debt and preferred securities.
If you chose $104.73, remember to subtract the depreciation and interest expense figures from the EBIDT figure, not from the sales figure itself. In other words, multiply the sales figure by the operating profit margin, THEN subtract the depreciation and interest expense figures.