Please help with this question. My understanding is that operating profit margin (40% as given here) equals EBIT/Sales and is therefore net of depreciation. However the answer requires deducting depreciation (given as 1.95/share) from operating profit to determine EPS. The answer is A, EPS=$4.19. Marie Vaszquez a semiconductor analyst with Smith, Kleen 8- Beetchnutty, has been working on a determination of an EPS figure for a semiconductor index. In her analysis, she has found the following: 1. Regressing sales for the series against Nominal GDP, the sales figure forthe index has been estimated at: $22.14. 2. Analyzing capacity utilization rates, foreign competition, rates of inflation and unit labor costs, the operating profit margin for the series has been determined to be: 40%. 3. Creating a time series based upon inputs such as levels of capital expenditures and PP&E turnover, next year’s depreciation-per-share has been determined to be: $1.95. 4. Creating a time series based upon levels of debt outstanding and prevailing debt yields, the interest expense for next year is determined to be: $0.23 per share. 5. Coordinating his research with a legislative consultant, the corporate tax rate forthis series has been estimated at: 37.3%. Using this information, what is the EPS figure forthis stock market series’? A. $4.19 B. $6.14 C. $2.49
dont have calculator so will post needed calculations
EBITDA = 22.14*40%(0.4)
then EBIT = 22.14*0.4-1.95
then NI = (22.14*0.4-1.95-0.23)-37.3% = so it is about 4$ per share
when you calculate operating profit margin no need to substract depreciation from the numerator.
But in the answer given, depreciation IS deducted to determine EPS after operating margin has been obtained. So does operating margin use EBIT or EBITDA?
I thought operating margin = EBIT / Sales, so EBIT = operating margin * sales,
so 22.14 * 40% = EBIT, not EBITDA?
What am I missing?
EDIT: Sorry to reiterate OP’s question.
Bumping thread because this is still giving me trouble. Anyone?
In the solution to another question that was part of this mock exam, operating profit margin is defined as EBDIT/Net Sales. < This is wrong per CFAI:
CFAI defines operating profit margin as: “A profitability ratio calculated as operating income (i.e., income before interest and taxes ) divided by revenue.”
So I conclude that the Analyst Notes mock exam gives the wrong solution.
*This forum should have a delete post option (does it?). Accidentally clicked on “Add comment” when want to disable rich-text.
So, in any case, we just follow EBIT/Sales?
Usually always it is EBIT, unless the ‘semi conductor’ industry uses EBITDA in calculation. Sometimes for companies with high depriciation assets, analysts use EBITDA to get a better reading (i.e. not affected by excessive depriciation)