Ambayec, Mounicha C. BSA-1 FM 19 Mrs.

Mary Joy
Teodosio

Finals Activity 2 (Answers)

1. AviBank Plastics generated an EPs of Php 2.75 over the last 12 months. The company’s
earnings are expected to grow by 25% next year, and because there will be no significant
change in the number of shares outstanding, EPS should grow at about the same rate.
You feel the stock should trade at a P/E of around 30 times earnings. Use the P/E
approach to set a value on this stock.

Given:

EPS: Php 2.75

Expected Growth: 25%
P/E: 30 times earnings

Solution:
Next year’s EPS= Current EPS x (1 + 25%)
Php 2.75 x (1.25%)
Next year’s EPS= Php 3.44

Stock’s Market Value = EPS x P/E

= Php 3.44 x 30
Stock’s Market Value = Php 103.20

Final Answer = Php 103.20

2. An investor estimates that next year’s sales for Ex and Whys Inc. should amount to about
Php 100 million. The company has 3 million shares outstanding, generates a net profit
 margin of about 8%, and has a payout ratio of 50%. All figures are expected to hold for
next year. Given this information, what is the expected price of the stock (P/E ratio is 30
times earnings).
Given:
Next year’s Sales Estimate : Php 100 million
Shares Outstanding : Php 3 million
Net Profit Margin : 8%
Payout Ratio : 50%
Estimated P/E Ratio : 30 times earnings

Solution:
a.) Estimated net earnings for next year or Future Earnings
Estimated net earnings= Estimated sales x Expected net profit margin
= Php Php 100,000,000 x 0.08
= Php 8,000,000

b.) Next year's dividends per share.

Estimated EPS= Estimated net earnings/Expected shares outstanding
= Php 8,000,000/3,000,000
= Php 2.6666  Php 2.67

Estimated dividends per share = Estimated EPS x Expected payout ratio

= Php 2.67 x 0.50
= Php 1.335  Php 1.34

c.) The expected price of the stock (assuming the P/E ratio is 30 times earnings).
Expected price of the stock = Estimated EPS x Expected P/E ratio
= Php 2.67 x 30
= Php 80.10
Therefore, the expected price of the stock assuming that the P/E ratio is 30 times earnings is Php
80.10.