 Personal finance practice problem using OneNote. Estimated future dividends and EPS earnings per share. Prepare to get financially fit by practicing personal finance. You're not required to, but if you have access to OneNote, would like to follow along. We're in the icon left-hand side, practice problems tab in the 12, 230, estimated future dividends and earnings per share tab. Also, take a look at the immersive reader tool, the practice problems typically in the text area too. Same name, same number, but with transcripts. Transcripts can be translated into multiple languages either listened to or read in them. We're considering investments in stocks, stocks representing an ownership interest in a corporation. Corporations being separate legal entities that have their ownership interest broken out into standardized units of stocks or shares. We are also generally thinking about publicly traded companies, those trading on public exchanges, giving individuals more access to them and allowing some transparency so we can see things like their financial statements for example. Also, you wanna keep separate your concepts of investing in stocks and you're investing using tools such as mutual funds and ETFs. When you're investing in stocks, we're gonna be drilling down oftentimes on the single company and their activity and their financial statements themselves. When you're looking at mutual funds, you might be looking at more kind of sections or sectors for example. So we're considering individual stocks typically here as we think about the earnings per share of them in order to give us a better idea oftentimes of whether or not the current price is under or overvalued possibly helping us out with our investment decisions. So if we have an earnings per share here and we were to do the earnings per share calculation over time, one way we can try to consider what's gonna happen in the future is to do kind of a trend type of analysis. So remember, you kinda wanna keep the two approaches separate in terms of how you're going to be considering your investment decisions in your mind. You could be drilling down on the basis of the financial statements themselves doing the ratio analysis and then trying to determine if the current market price is appropriate given your ratio analysis. Another approach might be to look at the trends, the past history of the activity that's happened over time in relation say to other stocks for example and then see if that trend will basically continue. So here we got the earnings per share calculation, a very common types of calculation. We could see the trend that is happening if we calculate it from X1 to X5 and if we were to plot this out, we can say okay well what is the difference as we move up and this is very easy to do for example in Excel, we do do this in Excel, it's quite common to have a running balance calculation like this and try to figure out what the difference is. So for example in X2 it was 13.8 minus X1 was 12, that's a $1.80 difference. If we do that again, we've got the 15.87 minus the 13.8. We're gonna get the 2.07 and so on and so forth and we get this trend of the earnings per share which is a nice upward trend. This is the kind of thing that we would be looking for in terms of hoping that that trend will continue in the future. This is also the kind of thing that most of the time the companies are shooting for. So you gotta be kind of careful in terms of what their objectives are but hopefully their financial statements are appropriate and audited and represented fairly. So we could then think about well what's the percentage increase? Because if I have this kind of trend, it might be useful but if I wanna compare it to other investments then I might wanna compare the trend on a percentage basis to other investments because the dollar amounts might be different. So I might say okay well then what was the percentage increase? Remember that these percentage increases are quite useful when valuing or measuring performance. We do them when we're thinking about testing sports athletes for example to see which is better, who's doing better job performance. That's what we're testing with an athlete same with just about any job. Really important to kind of have a concept of them. So what would be the percentage increase? Well we'll take the difference which is the 1.8 and we typically divide it not by the later number but the earlier number that's the starting point, the 12 and that gives us 15. If we move the decimal two places over 15%. Now this works out to be very, very standard here because obviously the next one 15% which would be the point 2.07 divided by the prior period which was 13.8 that's where that 15% comes from and then we could do this again and we could say okay this one was a change of the 2.38 divided by the prior period which was 15.87 and we get about 15% and then this one was the change of the 2.74 divided by the prior amount 18.25 we get about then 15%. So we get a very standardized percent increase here if it wasn't that standardized then of course we can kind of plot these out and we could figure out what the general trend would be basically just plotting the points out and trying to draw a trend line through it for example to get an idea of what we expect to happen in the future based on this trend. So earnings per share constant rate of growth assumes to continue so if we're gonna assume that's gonna continue then of course we could say well what's gonna happen next time in X6 well then we would say okay the earnings per share in X5 was the 20.99 and then also note that as we do this building these tables in different ways is really useful so I highly recommend doing these and building these in Excel and thinking about how to put your tables together. So I'm gonna say the increase percent was the earnings per share estimated growth is 15% plus one meaning it's gonna grow by 15% plus one or 100% so therefore we could take the 20.99 times 115% we would expect the estimated earnings per share to be the 24.14 earnings per share of course being a very common metric that we would want to be using to compare to other earnings per shares when we're trying to compare and contrast different investment decisions. So we can also think then well if we say that the dividend percent of earnings is 30% we can try to figure out what the dividends are. We wanna have a distinction between what the earnings per share is and what the dividends are. So for example in X5 if we have the earnings per share of $20.99 that does not mean that they're actually gonna be paying us out in the form of a dividend $20.99 the earnings per share basically is the earnings of the company which is the income statement amount the bottom line the net income in essence that we have earned say over a year for example allocated over the number of units of ownership there are which of course are the shares. We might have one person might own multiple shares but we're trying to allocate the income over into a per share basis. It might be a little bit more complicated in terms of the calculation you might have to take net income minus the preferred dividends if there are any divided by the weighted average if you'd wanna take the average but in general the idea would be to take the net income of the earnings allocated over the units of ownership the units of the units of shares. So for example if we had one share then the earnings per share we're saying is $20.99 but that doesn't mean that they're actually gonna give you that money in the form of a dividend because they may retain it. So remember what the dividends are the dividends represent the earnings of the company that are being distributed out to the owners similar to a draw for a sole proprietorship or partnership but if I was a sole proprietor or partnership I the partner could then determine how much I'm gonna get in terms of a draw. In a corporation you cannot have one share taking a different amount of draw or dividend than another share because all shares have to be the same and therefore the policy of the dividend distribution is determined by the company management board of directors. So their earnings is not all gonna be distributed out. So they might give you a dividend or they might retain the money. Either way it should give us an increase in the value in theory because if they retain the money that should be because they're trying to buy assets and buildings for example and whatnot equipment that they can use to generate revenue in the future strengthening the company increasing the value of it which should be reflected in the price and therefore the price should be reflected and going up as well so that we could sell it if we wanted to and generate revenue in that way. Now the dividend policy for a corporation usually they want the dividends to go up and up they don't want the dividends to go down. So if we're trying to predict the dividend policy it might be for example their latest dividends might be the or the trend in dividends might be something that we look at or they might have a policy that basically says hey I'm gonna pay you out 30% of whatever the earnings are as a standard kind of policy. So if that were the case then of course we could take whatever we configure our earnings per share and multiply it times the percent that they're gonna give out in form of a dividend that they've kind of committed to. So if we were to do that then we could say that if we had the 2414 in terms of the earnings per share times 30% that would give us the 7.24 that they would actually pay out 24.14 times the .3 that's gonna be the 7.24 per share that doesn't mean for each individual because one individual could have multiple shares $7.24 cents paid out per share and hopefully the rest the difference is being used constructively put back into the business and they're gonna generate revenue on it which should increase of course hopefully the price the market price which is determined by the supply and demand.