Case Problem8.2 An Analysis of a High-Flying Stock

1. LG2
2. LG6

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 five million shares outstanding and pays a nominal annual dividend of $0.05 per share. Marc has decided to take a closer look at C&I to assess its investment potential. Assume the company's sales for the past five years have been as follows:

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:

Questions

1. Determine the average annual rate of growth in sales over the past five years. (Assume sales in 2011 amounted to $7.5 million.)

a.Use this average growth rate to forecast revenues for next year (2017) and the year after that (2018).

b.Now determine the company's net earnings and EPS for each of the next two years (2017 and 2018).

c.Finally, determine the expected futurepriceof the stock at the end of this two-year period.

2.Because of several intrinsic and market factors, Marc feels that 25% is a viable figure to use for a desired rate of return.

a.Using the 25% rate of return and the forecasted figures you came up with in questiona, compute the stock'sjustified price.

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