A market researcher with Churn Brothers Brokerage is attempting to estimate the earnings per share (EPS) for a broad market index, and has assimilated the following information:
Sales per share: $700 -
Next year's operating profit margin: 25%
Next year's depreciation per share: $80
Next year's interest expense: $45.50
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.A
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).
Putting the given information into this equation will yield the following:
EPS for a stock market series = {[($700 * 0.25) - $80 - $45.50] * (1 - 0.35)} = $32.17
If you chose $112.67, remember that the depreciation figure is not added back to the EPS figure in the calculation of EPS for a stock market series. What we are looking at is operating earnings after tax, not a cash-based figure.