Median Permanent Earnings Ratio Analyzing Firm Fu
- Utilize excel to calculate the following for each firm:
- Permanent Earnings ratio (Perm EPS / Total EPS)
- Find the relationship between the various variables and stock price by plotting stock price against these variables in excel and using a straight line fit. Enable excel to display the equation of the best-fit line.
- Stock price (Y axis) vs Earnings per share (EPS) (X axis)
- Comment on the relationships above
- Is it a positive or negative relationship, or no relationship?
- How does stock price change for a unit change in EPS?
- Using excel, split the data up into two separate datasets – 1) firms with permanent earnings ratios that are higher than the median for the entire 100 firm sample (high permanent earnings firms) and 2) firms permanent earnings ratios that are lower than the median for the entire 100 firm sample (low permanent earnings firms). Utilize the =IF() function in excel. Assign the firm to be in the high median group if the firm’s permanent earnings ratio is greater than (>) the median.
- Utilize excel to plot stock price (Y axis) vs. EPS (X axis) for both samples. Enable excel to display the equation for the best-fit line.
- Comment on the whether and how the relationship between stock price and EPS differs between high permanent earnings firms and low permanent earnings firms.
- Comment on why there may be such a difference in the relationships between the stock prices of high permanent earnings firms and low permanent earnings firms
- Using the Projected next year Earnings, and the gradients for the best fit line equations, calculate the projected stock prices for high permanent earnings firms and low permanent earnings firms (use the 2 separate price-to-earnings-ratios). Subsequently:
- Calculate the Projected returns (for buying and holding the stock for one year) for each stock.
- Calculate the Projected Return on Investment (ROI) for investing in each high permanent earnings and each low permanent earnings firm
- Based on Projected ROI or Projected Returns, recommend the top 10 most profitable firms for investment. Be sure to analyze both high permanent earnings firms and low permanent earnings firms.
- Prepare a memo detailing all your findings (points 1 to 7) for presentation to management. Be sure to explain the relationships using plain English and include the best fit graphs as tools to supplement your written explanations. Make sure to explain in detail the process you took in your analysis to arrive at your conclusions. You may use simple equations to illustrate your explanations. Include an appendix where you provide all the previously calculated variables for these 10 recommended firms (limit this appendix to 1 page). Limit your memo to 4 double-spaced pages (excluding appendix). In your memo, be sure to include the following graded items:
- Comment on the general Price-to-earnings ratio for full sample. Accuracy of the ratio will be considered.
- Indicate how the Price-to-earnings ratio differs for the above median permanent earnings ratio group vs the below median permanent earnings ratio group. Explain why the price-to-earnings ratio of the two subsamples is better for use for projections instead of the full sample (hint: R2).
- Explain why you selected the 10 firm that you selected (Hint: either projected highest ROI or highest projected return)
- Explain how you calculated the projected stock price, and your metric of choice (for c)
- Provide the projected returns / ROI for your recommendations in the appendix (together with other calculated variables).