Calculating The Median To Find The Median Of A

Calculating The Medianin Order To Calculate The Median Of A Group Of V

Analyze the relationship between earnings and stock prices using Excel functions such as MEDIAN, IF, and plotting data with trendlines. Segment data based on median permanent earnings ratios, compare relationships between stock price and EPS for these groups, project future stock prices and returns, and select the most profitable firms for investment. Prepare a concise memo (up to 4 pages) explaining your findings, including graphs and calculations, and justify your investment choices with clear reasoning and calculations. Ensure to include all relevant computed variables and supporting data in an appendix.

Sample Paper For Above instruction

Introduction

Investing in stocks requires understanding the fundamental relationships between a company's financial performance and its market valuation. This paper aims to analyze the relationship between earnings and stock prices among a selection of firms, focusing on the impact of permanent earnings ratios on stock valuation and investment potential. Through the application of Excel functions like MEDIAN, IF, and trendline analysis, we will segment data, examine relationships, project future prices, and identify the most profitable investment opportunities. The ultimate goal is to provide a clear, data-driven recommendation for top firms to invest in over the upcoming year.

Data Analysis and Calculation of Metrics

The first step involves calculating the permanent earnings ratio for each firm. The permanent earnings ratio is defined as Permanent EPS divided by Total EPS, with Total EPS being the sum of Permanent EPS and Transitory EPS. Using Excel, the formula =PERMANENT_EPS / TOTAL_EPS was applied across all firms. This metric indicates the proportion of earnings deemed sustainable versus temporary fluctuations, thus serving as a critical indicator for valuation and future earnings stability (Penman, 2013).

Next, the relationship between stock prices and EPS was examined through scatter plots with trendlines. Plotting stock price (Y-axis) against EPS (X-axis), the equation of the best-fit line revealed the correlation strength, as well as the slope illustrating how much stock price changes with a unit change in EPS. Most firms displayed a positive relationship, consistent with the valuation principle that higher earnings generally lead to higher stock prices (Fama & French, 1992).

Segmentation Based on Permanent Earnings Ratios

Using the median permanent earnings ratio across all firms as a threshold, the dataset was split into two segments via the Excel =IF() function: one with ratios above the median (high permanent earnings firms) and the other below (low permanent earnings firms). This segmentation assumes that firms with higher sustainable earnings will have differing stock-price relationships compared to less stable firms, providing insight into valuation and investment risk (Basu, 1997).

Comparative Analysis of Relationships

Separate scatter plots and trendlines for each segment showed that high permanent earnings firms typically exhibited a more consistent and steeper relationship between EPS and stock price, indicated by higher R-squared values. Conversely, low permanent earnings firms showed a weaker and more variable relationship (R^2 lower), implying less reliable valuation based on EPS alone. This difference suggests that investors might rely more on earnings stability when evaluating high permanent earnings firms, making them potentially safer investments (Kothari & Warner, 2001).

Projection of Future Stock Prices and Returns

Using projected next-year Earnings and the slope coefficients from the trendlines, projected stock prices were calculated for each firm. The formula involved multiplying the projected EPS by the slope (price-to-EPS ratio) derived from the trendline. This yielded estimated future prices, which form the basis for calculating projected returns (Projected Price - Current Price) and ROI (Projected Return / Current Price). These calculations allow for assessing potential profitability relative to current valuations (Sharpe, 1966).

Investment Recommendations

Based on projected ROI, the top ten firms were selected, equally considering high and low permanent earnings groups. firms with the highest projected returns, whether due to high projected earnings or steep price-to-EPS ratios, were prioritized. The rationale focused on maximizing future gains aligned with the projected financial stability and growth prospects indicated by the analysis.

Conclusion

This report underscores the importance of assessing permanent earnings for stock valuation. Firms with higher permanent earnings ratios exhibit more predictable relationships between earnings and stock prices, making their valuation more reliable. Using Excel to segment data, calculate projections, and analyze relationships provides a robust framework for identifying promising investments. The selected top firms, based on projected ROI, exemplify the potential for informed, data-driven investment decisions that balance earnings stability with growth potential.

References

• Basu, S. (1997). The conservatism principle and the asymmetric timeliness of earnings. Journal of Accounting and Economics, 24(1), 3-37.
• Fama, E. F., & French, K. R. (1992). The cross‐section of expected stock returns. The Journal of Finance, 47(2), 427-465.
• Kothari, S. P., & Warner, J. B. (2001). Evaluating mutual fund performance. Journal of Accounting and Economics, 31(1-3), 105-168.
• Penman, S. H. (2013). Financial Statement Analysis and Security Valuation. McGraw-Hill Education.
• Sharpe, W. F. (1966). Mutual fund performance. Journal of Business, 39(1), 119-138.