3. Marc Dodier is a recent university graduate and a security analyst with the Kansas City brokerage firm of Lippman, Brickbats, and Shaft. Marc has been following one of the hottest issues on Wall Street, C&I Medical Supplies, a company that has turned in an outstanding performance lately and, even more important, has exhibited excellent growth potential. It has 5 million shares outstanding and pays a nominal annual dividend of 5 cents per share. Marc has decided to take a closer look at C&I to see whether it still has any investment play left. Assume the companys sales for the past five years have been as follows:

Year Sales ($ in millions) 2010 10.0, 2011 12.5, 2012 16.2, 2013 22.0, 2014 28.5

Marc 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 12% Estimated annual dividends per share 5 cents Number of common shares outstanding No change P/E ratio at the end of 2015 35 P/E ratio at the end of 2016 50

a) Determine the average annual rate of growth in sales over the past 5 years. (Assume sales in 2009 amounted to $7.5 million.)

b) Use this average growth rate to forecast revenues for next year (2015) and the year after that (2016).

c) Now determine the companys net earnings and EPS for each of the next 2 years (2015 and 2016).

d) Finally, determine the expected future price of the stock at the end of this 2-year period.

e) Using the 25% rate of return and the forecasted figures you came up with in d, compute the stocks justified (intrinsic) price.

f) If C&I is currently trading at $32.50 per share, should Marc consider the stock a worthwhile investment candidate? Explain.