Problem 1
You 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 2
You 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: $80
k = 0.09
Growth 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.