You are provided with the following information about Javier Corporation. Sales for the year 2010 were $500,000, and the Net Profit Margin (NPM) was 15 percent. Analysts project sales to grow by 12 percent next year (that is 2011). However, because of more competition, the NPM is expected to decline by 10 percent for the year 2010. The expected P/E multiple for the year 2011 is 22. The total number of shares outstanding is 20,000. Use the earnings multiplier model to calculate the expected price for Javier Corporation in the year 2011.
A) $74.25
B) $61.6
C) $82.5
D) $83.16
E) $101.64

Question

Quizplus · Accepted Answer

Step 1: Calculate the expected net income for 2011:
Net Income = Sales x NPM
Net Income for 2010 = $500,000 x 0.15 = $75,000
Expected Net Income for 2011 = $500,000 x 1.12 x (1-0.1) x 0.15 = $75,600

Step 2: Calculate the expected earnings per share (EPS) for 2011:
EPS = Net Income / Number of Shares
EPS for 2011 = $75,600 / 20,000 = $3.78

Step 3: Calculate the expected stock price for 2011 using the earnings multiplier model:
Expected Stock Price = EPS x P/E ratio
Expected Stock Price for 2011 = $3.78 x 22 = $83.16

Therefore, the correct answer is D, $83.16.

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