a. To estimate the net earnings for next year, we use the net profit margin formula:
Net Earnings = Sales * Net Profit Margin
Given that the estimated sales for next year are $75 million and the net profit margin is 5%, we can calculate:
Net Earnings = $75 million * 0.05 = $3.75 million
Therefore, the estimated net earnings for next year are $3.75 million.
b. To calculate next year's dividends per share, we use the payout ratio formula:
Dividends per Share = Net Earnings * Payout Ratio / Number of Shares
From part a, we know the net earnings are $3.75 million, and the payout ratio is 50%. The number of shares outstanding is 2.5 million. Plugging these values into the formula:
Dividends per Share = $3.75 million * 0.50 / 2.5 million = $0.75 per share
Therefore, the estimated dividends per share for next year are $0.75.
c. To calculate the expected price of the stock, assuming a P/E ratio of 24.5 times earnings, we use the following formula:
Expected Stock Price = Expected Earnings per Share * P/E Ratio
From part a, we know the estimated net earnings for next year are $3.75 million. To calculate the expected earnings per share:
Expected Earnings per Share = Net Earnings / Number of Shares
= $3.75 million / 2.5 million
= $1.50 per share
Plugging in the expected earnings per share and the P/E ratio of 24.5:
Expected Stock Price = $1.50 * 24.5 = $36.75 per share
Therefore, the expected price of the stock is $36.75.
d. To calculate the expected holding period return, we use the following formula:
Holding Period Return = (Ending Price - Beginning Price + Dividends) / Beginning Price
Given that the latest stock price is $25 per share, and from part b we know the dividends per share are $0.75, we can calculate the expected holding period return:
Holding Period Return = ($25 - $25 + $0.75) / $25
= $0.75 / $25
= 0.03 or 3%
Therefore, the expected holding period return is 3%.