Calculate the present value of abnormal earnings

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Reference no: EM132986528

Question - As at 30 June 2020, Harvey Norman Holdings Ltd is traded at $3.54 per share with a book value of $2.83 per share. An analyst expects that the company's earnings per share in 2021, 2022, and 2023 would be $0.40, $0.45, and $0.48, respectively. She also expects the company to pay dividends of $0.25, $0.26, and $0.25 per share in these three years, respectively. The cost of equity is expected to be 10%.

REQUIRED -

-Calculate the present value of abnormal earnings for the years 2021 to 2023.

-Calculate the terminal value assuming that the growth in abnormal earnings after 2023 would be 3%.

-Calculate the value of equity per share.

-Comment on whether the market price of $3.54 is overstated or understated. What would the analyst's recommendation be for her clients regarding this company's shares: buy, sell, or hold?

Reference no: EM132986528

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