**CFA Level 1 - Equity Investments**

Similar to a stock market series, a company's expected earnings per share (EPS) can be determined as

Where:

= the operating margin is typically calculated as a percentage of sales

Formula 13.10Formula 13.10

EPS _{stock market series} = [(sales)(operating margin) - depreciation - interest]*(1-tax) |

Where:

**Sales**= sales per share of the estimated series determined through regression**OM**

**Depreciation**= this is determined by either continuing the trend of the current depreciation or focusing on the expected capital expenditures and how that number relates to future dividends.**Interest**= interest is determined by outstanding debt and the interest rate on that debt.The inputs, however, are determined from specific company data.

**Example: Calculate the EPS of a company**

Assuming the following estimates for a company, sales per share = $50.00,

**Answer:**

EPS = [($50.00)(50%) - $5.00 - $1.00](1-0.40) = $11.40 per share

**Determining the Earnings Multiplier of a Company**

Similar to a stock market series, a company's earnings multiplier can be determined as follows:The price of the stock is simply divided by the earnings per share of the stock as follows:

**Formula 13.9 (restated)**

Earnings multiplier |

**Example:**

**Determining a company's earnings multiplier**

With Newco's $0.25 dividend payout, an EPS of $1.00, calculate the stock's P/E ratio assuming 10% required return and 5% growth.

**Answer:**

P/E ratio =

__0.25/1.00__= 5%

(0.10-0.05)

## 0 comments:

## Post a Comment