AN ANALYSIS OF A HIGH-FLYING SHARE Marc Dodier is a recent university graduate and a security… 1 answer below »

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AN ANALYSIS OF A HIGH-FLYING SHARE

Marc Dodier is a recent university graduate and a security analyst with the brokerage firm of Lippman, Shaft. Dodier has been following one of the hottest issues on the ASX: C&I Construction Supplies, a company that has turned in an outstanding performance lately and, even more importantly, has exhibited excellent growth potential. It has 5 million shares outstanding and pays a nominal annual dividend of 5 cents per share. Dodier has decided to take a closer look at C&I to see whether it still has any investment play left. Assume the company’s sales for the past five years have been as follows:

Dodier is concerned with the future prospects of the company, not its past. As a result, he pores over the numbers and generates the following estimates of future performance:

 

QUESTIONS

1. Determine the average annual rate of growth in sales over the past five years. (Assume sales in 2005 amounted to $7.5 million.)

a. Use this average growth rate to forecast revenues for next year (2011) and the year after that (2012).

b. Now determine the company’s net earnings and EPS for each of the next two years (2011 and 2012).

c. Finally, determine the expected future price of the share at the end of this two-year period.

2. Because of several intrinsic and market factors, Dodier feels that 25% is a viable figure to use for a   desired rate of return.

a. Using the 25% rate of return and the forecasted figures you came up with in question 1, compute the share’s justified price.

b. If C&I is currently trading at $32.50 per share, should Dodier consider the share a worthwhile investment candidate? Explain.

 

Q

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