Below are earnings per share for a firm. Year 0 earnings per share

are the actual earnings per share this year. Year 1 and 2 earnings per share are forecasts produced by an analyst. The required rate of return is 7% and the firm does not pay dividends nor will they pay dividends in the future.
 
   EPS
 Year 0    4.8
 Year 1    5.2
 Year 2         5.7
 
 
 
Required:
 
a)    Calculate abnormal earnings growth (AEG) for Year 2 using a pro forma.  
 
 
 
b)   What is the long-term growth rate in abnormal earnings growth (AEG) implied by market price of $160?                                                                                        
 
 
 
c)    Using the long term implied growth rate from part (b), forecast EPS for Year 3, 4 and 5 and produce a graph of EPS growth path from year 1 to 5 with an indicator for both BUY and SELL zones.                                                                          
 
 
 
d)   In the context of investment decision-making, what are the advantages of using the reverse-engineering approach instead of computing the intrinsic value?   

Answer rating: 100% (QA)

a Calculate abnormal earnings growth AEG for Year 2 using a pro forma AEG 575252 00962 b What is the ... View the full answer