this Q is from CFAi sample exam Vol1. Emanuel Rodriguez, CFO of Monterrey Spikes Sports Goods Inc., has gathered the following information about the company 2000 //2007 Sales $149.7 million //$220.0 million Return on assets (ROA) 10% //12% Net profit margin (NPM) 6% //7% Number shares outstanding 5 million //6 million expects sales in 2008 to grow at the historical compound annual growth of sales from the year 2000 to 2007. For the year 2008, the net profit margin and the number of shares outstanding are expected to remain unchanged from the year 2007. The company’s earnings per share (EPS), for the year 2008, is closest to A. 2.74 B. 2.77 C. 2.69 D. 2.75 answer = B “Company Analysis and Stock Valuation,” Frank K. Reilly and Keith C. Brown 2008 Modular Level I, Vol. 5, pp. 152-158 Study Session 14-59-b describe and estimate the expected earnings per share (EPS) and earnings multiplier for a company and use the multiple to make an investment decision regarding the company Compounded Annual Sales Growth — g% 2008 Sales = 2007 Sales × (1 + g) 2008 EPS = 2008 Sales × NPM / # of Shares FV = 220; PV = -149.7 N = 5; I / Y = ? g = 8% $220(1.08) =$237.60 million $237.60 × 0.07 / 6 = $2.77 --When calculating g, what’s the reason N=5? From 2000 to 2007, it should be N=7.
Are you positive that the answer is B? I got a C. And N should be 8.
n should be 7, just think for a second, if this was comparing 2000 to 2001 n would not be 2…
I got EPS = 2.71 (1+g)^7 = 220/149.7 -> g = 5.65% EPS = Sales*(1+g)*PM/Num_of_shares = 220*(1.0565)*7%/6 = 2.71 -> C is the closest
1 to 7 = 7 0 to 7 = 8 it’s exactly C when you take N = 8
It seems the answer I got is different from the one you guys have.
zenji Wrote: ------------------------------------------------------- > 1 to 7 = 7 > 0 to 7 = 8 > > it’s exactly C when you take N = 8 that means 0 to 0 = 1… ummm ok zenji you just go with that, but i recommend no one else follow your lead. also an important note to everyone preparing for the exam. it is very common in this multiple choice exam that questions with calculations will have answers to choose from that are a numerical value of a possible output when a common mistake is made… (for example, keying in the wrong N). so just keep that in mind when your calculator spits out a number that is the same as some choice… there is always the possibility you made a minor mistake, so dont justify your answer by the mere fact the number is staring you in the face from the exam. has anyone checked errata yet?
My bad. They probably made the same mistake.
“Expects sales in 2008 to grow at the historical compound annual growth of sales from the year 2000 to 2007.” Since sales are a figure that are accounted from the beginning of 2000 to the end of 2000 and the beginning of 2007 to the end of 2007, for the full years starting with 2000 and ending with 2007, we get: 2000 - 1 2001 - 2 2002 - 3 2003 - 4 2004 - 5 2005 - 6 2006 - 7 2007 - 8 N = 8
Hockey Wrote: ------------------------------------------------------- > 2000 - 1 > 2001 - 2 > 2002 - 3 > 2003 - 4 > 2004 - 5 > 2005 - 6 > 2006 - 7 > 2007 - 8 > > N = 8 ------------------------------------- Sorry, Hockey, I don’t agree. look at these datas, 2000 //2007 Sales $149.7 million //$220.0 million $149.7 is for whole 2000, $222 for whole 2007, i.e. year is measuring unit. we compare the data of Dec/31/2000 to the one of Dec/31/2007, not Jan/01/2000 to Dec/31/2007.
annexguy Wrote: ------------------------------------------------------- > Sorry, Hockey, I don’t agree. > look at these datas, > 2000 //2007 > Sales $149.7 million //$220.0 million > $149.7 is for whole 2000, $222 for whole 2007, > i.e. year is measuring unit. we compare the data > of Dec/31/2000 to the one of Dec/31/2007, not > Jan/01/2000 to Dec/31/2007. Ah so we’re taking 149.7 as our starting point and since it’s a growth rate problem, year 1 total TO year 2 total is the first “period.” I think I’m just making this mistake because I’m taking N to be the number of data points and not the number of periods taking 12/31/00 as the start. Thanks.
Anyone figure out what the most correct answer is on this? It seems to me that it should be 2.71, so… C is closest.
Even though it looks like n=8, I believe n=7 because we’re using fiscal year-end figures, starting from year-end 2000 (elements of the income statement are a flow concept, so they represent activity over a period of time). That’s where t=0. So then t=1 is year-end 2001, t=2 is year-end 2002…t=7 is year-end 2007. Therefore, n should be 7. With that said, the growth rate is 5.65% in sales. Applied to 2007 sales, 2008 sales is approximately $232.44 million. Multiply by a constant net margin of 7% and you get $16.27 million in NI. Divide by 6 million shares, and you end up with $2.71 per share. I sure hope we don’t see mistakes like this on exam day.