John Right, an analyst with Stock Pickers Inc., claims: “It is not worth my time to develop detailed forecasts of sales growth, profit margins, et cetera, to make earnings projections. I can be almost as accurate, at virtually no cost, using the random walk model to forecast earnings.” What is the random walk model? Do you agree or disagree with John Right’s forecast strategy? Why or why not?
Answer to relevant QuestionsWhich of the following types of businesses do you expect to show a high degree of seasonality in quarterly earnings? Explain why.Joe Watts, an analyst at EMH Securities, states: “I don’t know why anyone would ever try to value earnings. Obviously, the market knows that earnings can be manipulated and only values cash flows.” Discuss.Striate Company is valued at $20 per share. Analysts expect that it will generate free cash flows to equity of $4 per share for the foreseeable future. What is the firm’s implied cost of equity capital?Calculate the proportion of terminal value to total estimated value of equity under the abnormal earnings method and the discounted cash flow method for the Scenario 2 results shown in Table 8-6. Why are these proportions ...Intergalactic Software Company’s stock has a market price of $20 per share and a book value of $12 per share. If its cost of equity capital is 15% and its book value is expected to grow at 5% per year indefinitely, what is ...
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