P8.26 Marc Dodier is a recent university graduate and a security analyst with the Kansas City bro- kerage firm of Lippman, Brickbats, and Shaft. Dodier has been following one of the hottest issues on Wall Street, C&I Medical Supplies, a company that has turned in an outstanding per- formance lately and, even more important, has exhibited excellent growth potential. It has 5 mil- lion 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: Year Sales (in millions) 2006 $10.0 2007 12.5 2008 16.2 2009 22.0 2010 28.5 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: Expected net profit margin Estimated annual dividends per share Number of common shares outstanding P/E ratio at the end of 2011 P/E ratio at the end of 2012 12% 5 No change 35 50 Questions

a. Determine the average annual rate of growth in sales over the past five years. (Assume sales in 2005 amounted to $7.5 million.) 1. Use this average growth rate to forecast revenues for next year (2011) and the year after that (2012). 2. Now determine the company's net earnings and EPS for each of the next two years (2011 and 2012). 3. Finally, determine the expected future price of the stock at the end of this two-year period.

b. Because of several intrinsic and market factors, Dodier feels that 25% is a viable figure to us for a desired rate of return. 1. Using the 25% rate of return and the forecasted figures you came up with in question

a, compute the stock's justified price. 2. If C&l is currently trading at $32.50 per share, should Dodier consider the stock a worthwhile investment candidate? Explain.