Alpha Inc. is currently trading at 31.25 times forward earnings (for the fiscal year 2004) of $0.64 per share. Analysts are also forecasting eps of $0.74 for 2005. Given that the Book value of shareholders’ equity (from the 2003 balance sheet) is $28,029 million and Shares outstanding is 6,998 million

The firm pays no dividends. Use a cost of equity capital of 9% in all calculations.

1. calculate Alpha’s book value per share. Then calculate the price-to-book ratio at which Alpha’s shares are currently trading.

2. Forecast residual earnings (RE) for 2004 and 2005 from the analysts’ forecasts.

3. Given the market accepts the analysts’ forecasts for 2004 and 2005, what is the markets’ implicit forecast of growth in residual earnings for 2006 and beyond? (Hint: what is the growth rate?)

4. What eps is the market forecasting for 2006?

5. From the eps forecasts you now have for 2004-2006, calculate expected abnormal earnings growth (AEG) for 2005 and 2006.

6. What abnormal earnings growth rate is implied by the current market price for years after 2006?

7. Show that expected abnormal earnings growth (AEG) for 2005 and 2006 is equal to the change in residual earnings for those years.

8. What cum-dividend growth rates in earnings per share is the market forecasting for 2005 and 2006?

1. Based on your analysis, would you buy a Alpha share at 31.25 times forward earnings? Qualify you answer as much as you wish.

Answer rating: 100% (QA)

Book value per share Book value of shareholders equityShares outstanding 28029 million699... View the full answer