EPS Calculation for Stock Market Series

EPS Calculation

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Question

A market strategist with East Coast Brokerage is examining a stock market series and trying to determine an appropriate EPS figure. In her analysis, this market strategist has determined the following information:

1. Regressing sales for the series against Nominal GDP, the sales figure for the index has been estimated at: $21.

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 32%.

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 $1.10.

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 $1.03 per share.

5. Coordinating his research with a legislative consultant, the corporate tax rate for this series has been estimated at: 35.15%.

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

Answers

Explanations

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Explanation

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 = [($21 * 0.32) - $1.10 - $1.03] * (1 - 0.3515) = $2.98

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