2.) a) Explain fully what abnormal earnings are. What does it mean when a company generates positive abnormal earnings?

(6 marks)

b) What kind of a company would be expected to have zero abnormal earnings in the future, forever? Explain carefully.

(3 marks)

c) When performing business strategy analysis and prospective analysis, briefly explain how you would assess to what extent a company which currently has positive abnormal earnings will be able to maintain these abnormal earnings in future years.

(3 marks)

d) Honn Cos financial year is the calendar year. Its cost of equity capital is 8% and its share price at the end of 2020 is TWD (NT$) 975.

The median analyst earnings per share (EPS) forecast is NT$ 59 for 2021 and NT$ 79 for 2022. Dividends per share (DPS) are expected to be NT$ 33 in both years.

This is based on 2,000 million shares outstanding in 2020, 2021 and 2022.

The companys book value of equity was NT$ 342,800 million at the end of 2020.

Calculate the 2021 and 2022 abnormal earnings implied by the analysts forecasts.

(4 marks)

e) If the above forecasts turn out to be correct and abnormal earnings grow by 1% p.a. in perpetuity from 2023 onwards, are Honn Cos shares overvalued or undervalued at the end of 2020? Show all your calculations.

(6 marks)

f) Based on the same assumptions, calculate a target share price at the end of 2021.

(3 marks)