An investor estimates that next year’s sales for New World Products should amount to about $75 million. The company has 2.5 million shares outstanding, gener- ates a net profit margin of about 5% , and has a payout ratio of 50% . All figures are expected to hold for next year. Given this information, compute the following.

a.Estimated net earnings for next year.
b.Next year’s dividends per share.
c.The expected price of the stock (assuming the P/E ratio is 24.5 times earnings).
d.The expected holding period return (latest stock price: $25/share)

a. To estimate the net earnings for next year, we use the net profit margin formula:

Net Earnings = Sales * Net Profit Margin

Given that the estimated sales for next year are $75 million and the net profit margin is 5%, we can calculate:

Net Earnings = $75 million * 0.05 = $3.75 million

Therefore, the estimated net earnings for next year are $3.75 million.

b. To calculate next year's dividends per share, we use the payout ratio formula:

Dividends per Share = Net Earnings * Payout Ratio / Number of Shares

From part a, we know the net earnings are $3.75 million, and the payout ratio is 50%. The number of shares outstanding is 2.5 million. Plugging these values into the formula:

Dividends per Share = $3.75 million * 0.50 / 2.5 million = $0.75 per share

Therefore, the estimated dividends per share for next year are $0.75.

c. To calculate the expected price of the stock, assuming a P/E ratio of 24.5 times earnings, we use the following formula:

Expected Stock Price = Expected Earnings per Share * P/E Ratio

From part a, we know the estimated net earnings for next year are $3.75 million. To calculate the expected earnings per share:

Expected Earnings per Share = Net Earnings / Number of Shares
= $3.75 million / 2.5 million
= $1.50 per share

Plugging in the expected earnings per share and the P/E ratio of 24.5:

Expected Stock Price = $1.50 * 24.5 = $36.75 per share

Therefore, the expected price of the stock is $36.75.

d. To calculate the expected holding period return, we use the following formula:

Holding Period Return = (Ending Price - Beginning Price + Dividends) / Beginning Price

Given that the latest stock price is $25 per share, and from part b we know the dividends per share are $0.75, we can calculate the expected holding period return:

Holding Period Return = ($25 - $25 + $0.75) / $25
= $0.75 / $25
= 0.03 or 3%

Therefore, the expected holding period return is 3%.