Refer back to the valuation in Exercise E6.3. In the pro forma there, an analyst forecasted earnings of $388 million
Refer back to the valuation in Exercise E6.3. In the pro forma there, an analyst forecasted earnings of $388 million for 2010. The forecast was made at the end of 2009 based on preliminary reports from the firm. When the final report was published, however, the analyst discovered that the firm had decided to write down its inventory at the end of 2009 by $114 million (following the lower of-cost-or-market rule). As this was inventory that the analyst had forecasted would be sold in 2010 (and thus the impairment affects cost of goods sold for that year), the analyst revised her earnings forecast for 2010. For questions (a) and (b), ignore any effect of taxes.
a. What is the revised earnings forecast for 2010 as a result of the inventory impairment assuming no change in sales forecasts?
b. Show that there vision in the forecast of 2010 earnings does not change the valuation of the equity.
c. Now assume that the firm's income tax rate is 35 percent. Do your answers to questions (a) and (b) change?
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