EPS Figure for Stock Market Series Calculation | CFA Level 1 Exam Prep

EPS Figure for Stock Market Series Calculation

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Question

A portfolio manager with an independent money management firm has been examining a stock market series and is trying to determine an appropriate EPS figure for the series. In her research, this portfolio manager has determined the following information:

1. Regressing sales for the series against Nominal GDP, the sales figure for the index has been estimated at: $19.85.

2. Analyzing capacity utilization rates, foreign competition, rates of inflation and unit labor costs, the operating profit margin for the series has been determined to be 31%.

3. Creating a time series based upon inputs such as levels of capital expenditures and PP&E turnover, next year's depreciation-per-share has been determined to be: $1.18.

4. Creating a time series based upon levels of debt outstanding and prevailing debt yields, the interest expense for next year is determined to be: $0.61 per share.

5. Coordinating his research with a legislative consultant, the corporate tax rate for this series has been estimated at: 34.77%.

Using this information, what is the EPS figure for this stock market series?

Answers

Explanations

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A. B. C. D. E.

B

All of the necessary information has been provided in this example. To determine the EPS for a stock market series, the following steps are necessary:

Step 1: Estimate sales-per-share for the series:

Step 2: Estimate operating profit margin for the series

Step 3: Estimate the depreciation-per-share for next year

Step 4: Estimate the interest expense-per-share for the next year

Step 5: Estimate next year's corporate tax rate

Once these five steps have been completed, the calculation of EPS for a stock market series is found by the following:

EPS = [(Sales per share * Operating profit margin) - Depreciation-per-share - Interest Expense] * (1 - Corporate Tax Rate)

The calculation of EPS for this stock market series is shown as follows: EPS = [($19.85 * 0.31) - $1.18 - $0.61] * (1 - 0.3477) = $2.85

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