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Problem 1 You are given the following estimated per share data related to the SP Industries Index for the year 2013: Sales $1,450.00 Depreciation...
Problem 1You are given the following estimated per share data related to the S&P Industries Index for the year 2013: Sales $1,450.00 Depreciation $58.00 Interest Expense $28.00 You are also informed that the estimated operating profit (EBIT) margin is 12% and the tax rate is 32%. a. Compute the estimated EPS for 2013. b. Assume that a member of the research committee for your firm feels that it is important to consider a range of operating profit margin (OPM) estimates. Therefore, you are asked to derive both optimistic and pessimistic EPS estimates using 11% and 13% for the OPM and holding everything else constant. Problem 2Given the three EPS estimates in Problem 6, you are also given the following estimates related to the market earnings multiple: Pessimistic Concensus Optimistic D/E 0.65 0.55 0.45 Nominal RFR 0.10 0.09 0.08 Risk Premium 0.05 0.04 0.03 ROE 0.11 0.13 0.15 a. Based on the three EPS and P/E estimates, compute the high, low, and consensus intrinsic market value for the S&P Industrials Index in 2013. b. Assuming that the S&P Industrials Index at the beginning of the year was priced at 2,050, compute your estimated rate of return under the three senarios from Part a. Assuming your required rate of return is equal to the consensus, how much would you weigh the S&P Industrials Index in your global portfolio?Problem 3You are analyzing the U.S. equity market based upon the S&P Industrial Index and using the present value of free cash flow to equity technique. Your inputs are as follows:Beginning FCFE: $80k = 0.09Growth Rate:Year 1-3: 9%4-6: 8%7 and beyond: 7%a – Assuming that the current value for the S&P Industrials Index is 2,050, would you underweight, overweight, or market weight the U.S. equity market?b – Assume that there is a 1 percent increase in the rate of inflation – what would be the market’s value, and how would you weight the U.S. market? State your assumptions.Problem 4Evaluate your industry in terms of the five factors that determine an industry’s intensity of competition. Based on this analysis, what are your expectations about the industry’s profitability in the short run (1 or 2 years) and the long run (5 to 10 years)?Problem 5Usung Standard and Poor’s Analysts’ Handbook or another source, plot the latest 10 – year history of the perpating profit margin for the S&P Industrials Index, or another aggregate market series versus an industry of your choice, Is there a positive, negative, or zero correlation?Problem 7Prepare a table listing the variables that influence the earnings multiplier for your choosen industry and the market index series for the most recent 10 years.a – Do the average dividend-payout ratios for your industry and the market index differ? How shold the dividend payout influence the difference between the multiplier?b- Based on the fundamental factors, would you expect the risk for this industry to differ from that for the market? In what direction, and why? Calculate the industry beta using monthly data for five years. Based on the fundamental factors and the computed systematic risk, how does this industry’s risk compare to the market? What effect will the differemce in risk have on the industry multiplier relative to the market multiplier?c- Analyze and discuss the different components of growth (retention rate, total asset turnover, total assets/equity, and profit margin) for your chosen industry and a market index during the most recent 10 years. Based on this analysis, how would you expect the growth rate for your industry to compare with the growth rate for the market index? How would this difference in expected growth affect the multiplier?
