Buy Permanent Earnings Ratio Assignment

Buy Permanent Earnings Ratio Assignment
1. Utilize excel to calculate the following for each firm:
a. Permanent Earnings ratio (Perm EPS / Total EPS)
2. 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.
a. Stock price (Y axis) vs Earnings per share (EPS) (X axis)
3. Comment on the relationships above
a. Is it a positive or negative relationship, or no relationship?
b. How does stock price change for a unit change in EPS?
4. 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.
Buy Permanent Earnings Ratio Assignment
5. Utilize excel to plot the Stock price (Y axis) vs. EPS (X axis) for both samples. Enable excel to display the equation for the best-fit line.
a. Comment on the whether and how the relationship between stock price and EPS differs between high permanent earnings firms and low permanent earnings firms.
b. 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
6. 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:
a. Calculate the Projected returns (for buying and holding the stock for one year) for each stock.
b. Calculate the Projected Return on Investment (ROI) for investing in each high permanent earnings and each low permanent earnings firm
7. 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.
8. 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. 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 your memo to 4 double-spaced pages. In your memo, be sure to include the following graded items:
Buy Permanent Earnings Ratio Assignment
a. Comment on the general Price-to-earnings ratio for full sample. Accuracy of the ratio will be considered. (3 pts)
b. Indicate how the Price-to-earnings ratio differs for the above median permanent earnings ratio group vs the below median permanent earnings ratio group (3 pts). Explain why the price-to-earnings ratio of the two subsamples is better for use for projections instead of the full sample (hint: R2).
c. Explain why you selected the 10 firm that you selected (Hint: either projected highest ROI or highest projected return) (3pts)
d. Explain how you caculated at the projected stock price, and your metric of choice (for c) (3pts)
e. Provide the projected returns / ROI for your recommendations. (3 pts)
f. Submit before the deadline (25 pts).
Definitions:
1. Total EPS = Permanent EPS transitory EPS
2. Earnings per share (EPS) = total earnings / number of outstanding shares
3. Price-to-earnings ratio = Stock price / EPS
4. Permanent earnings ratio = Permanent EPS / total EPS
5. Projected Returns = Projected Stock Price – Stock Price
6. Projected ROI = Projected Returns / Stock Price
Appendices:
Appendix A – Excel spreadsheet
Data file containing information about firms
Appendix B – Pdf file
Excel guidance: How to make a straight line fit (regression line) using Excel
https://dataprivacylab.org/courses/popd/lab2/ExcelLine.pdf
Appendix C – Word document
Contains basic information about some relevant Excel functions.

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