FIN 402 MASTER 1 Predictable World / fin402master.com FIN 402 MASTER 1 Predictable World / fin402master. | Page 40
FIN 402 Week 3 AssignmentCase Problem 8.2 An Analysis
of a High-Flying Stock
FOR MORE CLASSES VISIT
www.fin402master.com
Case Problem 8.2 An Analysis of a High-Flying Stock Marc Dodier is
a recent university graduate and a security analyst with the Kansas
City brokerage firm of Lippman, Brickbats, and Shaft. Marc has been
following one of the hottest issues on Wall Street, C&I Medical
Supplies, a company that has turned in an outstanding performance
lately and, even more important, has exhibited excellent growth
potential. It has five million shares outstanding and pays a nominal
annual dividend of $0.05 per share. Marc has decided to take a closer
look at C&I to assess its investment potential. Assume the company’s
sales for the past five years have been as follows: Marc is concerned
with the future prospects of the company, not its past. As a result, he
pores over the numbers and generates the following estimates of
future performance: Questions a. Determine the average annual rate
of growth in sales over the past five years. (Assume sales in 2011
amounted to $7.5 million.) 1.
Use this averag e growth rate to
forecast revenues for next year (2017) and the year after that (2018).
2.
Now determine the company’s net earnings and EPS for each of
the next two years (2017 and 2018). 3. Finally, determine the
expected future price of the stock at the end of this two-year period. b.
Because of several intrinsic and market factors, Marc feels that
25% is a viable figure to use for a desired rate of return. 1. Using
the 25% rate of return and the forecasted figures you came up with in
question a, compute the stock’s justified price. 2. If C&I is currently
trading at $32.50 per share, should Marc consider the stock a
worthwhile investment candidate? Explain.