Question

PART 1) An investor estimates that next​ year's sales for​ Dursley's Hotels,​ Inc., should amount to about 105 Million.The company has 3.1 million shares​ outstanding, generates a net profit margin of about 8.1​%, and has a payout ratio of 41​%. All figures are expected to hold for next year. Given this​ information, compute the following.

a. Estimated net earnings for next year.

b. Next​ year's dividends per share.

c. The expected price of the stock​ (assuming the​ P/E ratio is 28.3 times​ earnings).

d. The expected holding period return​ (latest stock​ price: ​$48.93 per​ share).

Part 2) Melissa Popp is thinking about buying some shares of R.H. Lawncare​ Equipment, at $53.35 per share. She expects the price of the stock to rise to $ 56.17 over the next 3 years. During that time she also expects to receive annual dividends of $ 6.81 per share.

a. What is the intrinsic worth of this​ stock, given a required rate of return of 9%​?

b. What is its expected​ return?

Answer 1

Here given;

Estimated Sale= $105 million

Outstanding share =3.1 million8.1%

net profit margin=8.1%

Dividend pay out ratio=41% Now;

a. Estimated net earnings for next year;

Estimated sales Net profit margin = Net earnings

$105 million8.1%=$8.505

b.Next year dividend per share

Net earning/Out standing shares Dividend pay out ratio

$8.505/3.1 million shares 41%=$1.125 per share

c. expected market price

=Earning per share P/E multiple

=$1.125 per share28.3 times=$31.838 per share market price

d. holding period return;

dividend per share+[sale price-purchase price]/purchase price

$1.125+{$31.838-$48.93}/$31.838=-0.537 or (53.7%) negative

2nd part

a.Intrinsic value of share

A.Annual dividend earning present value=$6.81 share@ 9%PVAIF =$6.81*2.531=$17.236

B.year end at 3 rd year capital appreciation received present value @ 9%=$(56.17-53.35)=$2.82*0.772=$2.177

Intrinsic value =A+B=$19.413

b expected return;

Capital appreciation+ dividend Received/Purchase price*100

$2.82+$20.43($6.81*3)/$53.35*100=43.580% expected return.