An investor estimates that next year's sales for Dursley's Hotels Inc. should amount to about $100 million. The company has 5 million shares outstanding, generates a net profit margin of about 10 %, and has a payout ratio of 50 %. 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 24.5 times earnings).

d. The expected holding period return (latest stock price: $40 per share).

(a) $10 million

(b) $1 per share

(c) $49

(d) 25 %

Explanation:

(a) Estimated net earnings for next year.

Sales next year = $100 million

Net profit margin = 10%

Net profit margin = Net Income : Sales

Net Income = 10% * $100 million

= $10 mil lion

(b) Next year's dividends per share.

Dividend payout = Dividends paid : Net Income

= 50%

Dividends paid = $10 * 50%

= $5 mil lion

Per share dividend = Dividend paid : Shares outstanding

= $5 million : 5 million

= $1 per share

(c) The expected price of the stock (assuming the P/E ratio is 24.5 times earnings).

Earnings per share:

= Net income : shares outstanding

= $10 million : 5 million

= $2 per share

P/E Ratio = Price per share : Earnings per share

Price per share = $2 * 24.5

= $49

(d) The expected holding period return (latest stock price: $40 per share).

= (Final price - Initial price + Dividend) : Initial Price

= ($49 - $40 + $1) : $40

= 25%