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 company’s sales for the past five years have been as follows:

Year ......Sales

($ in millions)

2009 .......10.0

2010 .......12.5

2011 .......16.2

2012 .......22.0

2013 .......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¢

Number of common shares outstanding .......No change

P/E ratio at the end of 2014 ........... 35

P/E ratio at the end of 2015 ............ 50

Questions

a. Determine the average annual rate of growth in sales over the past 5 years.

1. Use this average growth rate to forecast revenues for next year (2014) and the year after that (2015).

2. Now determine the company’s net earnings and EPS for each of the next 2 years (2014

and 2015).

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

b. Because of several intrinsic and market factors, Marc feels that 25% is a viable figure to use 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&I is currently trading at $32.50 per share, should Marc consider the stock a worth-while investment candidate? Explain.