S&P 500 sales have been estimated at $723 per share while the operating profit margin has been estimated at 16.6%. The average tax rate on S&P 500 companies is about 40%, with an average depreciation of 4.7% and an interest expense of 1.3%, all expressed as a percentage of sales. The average payout ratio on S&P 500 is 17%. Assuming a 2.8% growth rate in the economy and an investor demand of 12% return on equity, the per share S&P 500 must be valued at:
Click on the arrows to vote for the correct answer
A. B. C. D.B
operating profits = Earnings before depreciation, interest & taxes = EBDIT and operating profit margin = EBDIT/net sales. Therefore, net income/sales = (EBDIT/ sales - depreciation/sales - interest/sales)*(1-tax rate) = (16.6% - 4.7% - 1.3%)*(1-40%) = 6.36%.
Thus, earnings = 6.36% * 723 = $45.98 per share.
In the usual notation, the Dividend Discount Model gives Po = D1/(k-g). In this case, g = 2.8% and the expected dividend per share next year = 45.98 * 17%*(1
+2.8%) = $8.04 per share. Therefore, Po = 8.04/(12% - 2.8%) = $87.34 per share.