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 Rodriguez 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. $4.69. D. $4.75.
ans A Sales 2000-2007 ==> 6 years grows from 149.7 -> 220 growth rate = (220/149.7)^(1/6) = 1.0663 sales 2008 = 220 * 1.0663 = 234.59 NI 2008 = 234.59 * .07 = 16.42 EPS = 16.42 / 6 = 2.736 ==> A
N5, PV -149.7, FV 220, PMT 0 CPT I/Y = 8% 8% is the growth rate of sales. 220(1.08) = 237.60. Sales for 2008 is expected to be near this number. Therefore 237.7(.07) = 166.43 (net income) 166.43 - 0 Preferred Div/6 (million shares) = 2.77
ditch - why was n=5??
My apology. I saw this question on an old exam and thought this was identical. N should be 6.
Shouldn’t n be equal to 7. Why is it equal to 6? Don’t you consider the current year? Bests, Alex.
2000-2001 is 1 year. so it would be (7-1) years in total for the period 2000-2007 you are looking at in between’s kind of.
From the question, it says: “For the year 2008, the net profit margin and the number of shares outstanding are expected to remain unchanged from the year 2007.” Shouldn’t it say that the percentage remains same? Initially upon reading the question, I got the impression that absolute value of NPM remained same as 2007. Ofcourse, that would be too easy and that isnt an option in answer choice …but still … the question seems to be badly phrased
I’m still not getting that it is 6 years. End of 2000 would be one sales number End of 2007 would be another sales number Sales are end of period numbers, not beginning or middle of period, right? Can someone please clarify
No I am wrong. You guys are saving me!
So u got 6, how? I still believed 7 …
smartrisk, draw out a timeline At time 0, which is present value, sales are 149.7 million which is THE END of 2000 or beginning of 2001, which is your starting value. You are putting that as present value in your calculator, so it is t = 0.
1/1/2001 - 12/31/2001 = First year of growth 1/1/2002 - 12/31/2002 = Second year of growth 1/1/2003 - 12/31/2003 = Third year of growth 1/1/2004 - 12/31/2004 = Fourth year of growth 1/1/2005 - 12/31/2005 = Fifth year of growth 1/1/2006 - 12/31/2006 = Sixth year of growth 1/1/2007 - 12/31/2007 = Seventh year of growth Here’s my time line. Still confused. Anyone?
ditchdigger2CFA Wrote: ------------------------------------------------------- > My apology. > > I saw this question on an old exam and thought > this was identical. N should be 6. Doing it your way: n=6 PV= -149.7 PMT=0 FV=220 [cpt][i/y]= I get 6.627 for the growth rate. “sales in 2008 to grow at the historical compound annual growth of sales from the year 2000 to 2007” Using n=6 kinda means using the years in between, but dont you want to include 2007’s figures and thus N=7… g=5.654?
Nevermind. got it. Thanks i love you all.
Love is a very strong word. Are you sure you really love us? chasinggoats, I think in the question, it’s implying that at the newest sales number is him looking at the beginning of 2007, otherwise you are right, there is another period of compounding missing. Look at the end of chapter questions for the time value section in the CFAI, question 20 I think. There is a question on compounding EPS but it’s much less ambiguous. This question sucks.