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Calculate abnormal earnings growth

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Reference no: EM133171166

Question - Below are earnings per share for a firm. Year 0 earnings per share are the actual earnings per share this year. Year 1 and 2 earnings per share are forecasts produced by an analyst. The required rate of return is 6% and the firm does not pay dividends nor will they pay dividends in the future.

Year 0

Year 1

Year 2

EPS

4.70

5.00

5.50

Required -

1. Calculate abnormal earnings growth (AEG) for Year 2 using a pro forma.

2. What is the long-term growth rate in abnormal earnings growth (AEG) implied by market price of $200?

3. Using the long term implied growth rate from part (b), forecast EPS for Year 3, 4 and 5 and produce a graph of EPS growth path from year 1 to 5 with an indicator for both BUY and SELL zones.

4. In the context of investment decision-making, briefly discuss the issues fundamental investors face while calculating intrinsic value. Also, discuss how fundamental investors overcome those issues.

Reference no: EM133171166

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