Question 1
a) Step 1: Forecast future sales and profits
Forecasted future sales normally based on the historical trends adjusted for anticipated
changes in operations or environment and given a reasonable sales in future.
Forecasted net profit margin normally based on the historical trends adjusted for
anticipated changes in operations or environment and given a reasonable net profit
margin in future. And calculate the profits of the years by using the net profit margin
that you had forecasted.
For example, if a company earn RM40 million currently, and estimated the future
revenue will growth at 10% and the net profit margin is expected to be 15%
So the estimated future after tax earnings will be RM 6.6 million
Estimated Future after tax earning = Estimated sales x Expected net profit margin
Estimated Future after tax earning = (40 million x 1.1) x 0.15
= 44 x 0.15
= RM6.6 million
Step 2: Forecast future EPS
Forecasted outstanding shares of common stock normally based on continued
historical trends and historical trends adjusted for anticipated changes in operations or
environment, and give a reasonable EPS in future.
For examples, assume the company’s estimate profits are RM 6.6 million, and 5
million outstanding. So the future estimated EPS will be RM 1.32
Estimated EPS = Estimated future after tax earnings/number of outstanding shares
Estimated EPS = RM 6.6 million/5 million
= RM 1.32
Forecast future dividends
Forecasted dividend payout ratio normally based on the continued historical trends or
historical trends adjusted for anticipated changes in operations or environment, and
given a reasonable dividends in future.
For examples, assume the company’s dividend payout ratio is 35%. So the future
estimated dividend per share will be RM0.462
Estimated dividends per share = Estimated EPS x Estimated payout ratio
Estimated dividends per share = RM 1.32 x 0.35
= RM 0.462
Step 3: Forecast P/E ratio
Forecasted P/E ratio normally based on the average market multiple of all stocks in
the marketplace. This can be adjusted based on the expectations of economic
conditions, general stock market outlook in near term. Besides, estimated of the P/E
ratio must consider in some variable of function which is growth rate in earnings,
level of dividends, amount of debt in a company’s capital structure and others.
For examples assume the estimated EPS is RM 1.32 and the estimated P/E ratio is 10.
So the estimated share price in future will be
Estimated share price in future = Estimated Eps x Estimated P/E ratio
Estimated share price in future = Rm 1.32 x 10
= Rm 13.2
