Consider the following two earnings forecasting models:

Model 1 (Random walk model)        E_t(EPS_t+1) = EPS _t

Model 2 (Mean-reverting model)     E_t(EPS_t+1) =

E_t(EPS_t+1) is the EPS forecast for year t+1, given information available at t.

The EPS for TJX for the fiscal years ending January 2006 (FY2005) through January 2010 (FY2009) are:

Fiscal Year	2005	2006	2007	2008	2009
EPS	$1.40	$1.60	$1.70	$2.00	$2.80

Part a): What would be the EPS forecast in FY2010 for each model?

• Model 1 (random walk model):
• Model 2 (mean-reverting model):           

Part b): Actual EPS for TJX in FY2010 were $3.30. Given this information:

What would be the FY2011 forecast for earnings per share for each model?

Why do the two models generate quite different forecasts?

Which model (random walk or mean-reverting) do you think better describes TJX’s earnings per share patterns? Explain.