Q1 The following forecast is made for Kallang Ltd: EPS (Earnings per Share) DPS (Dividends per...

 

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Q1 The following forecast is made for Kallang Ltd: EPS (Earnings per Share) DPS (Dividends per Share) 2021 S 6.00 0.50 2022 $ 7.20 0.50 2023 $ 8.20 0.50 The ROCE (Return on Common Equity) for 2021 is 10% The expected market return is 6% and the risk-free return is 2%. Kallang Ltd has an equity beta of 2. Required: For Kallang Ltd: (a) Compute the AEG (Abnormal Earnings Growth) for 2022 and 2023. (10 marks) (b) Compute the normal forward P/E (price-earnings) ratio expected as at 1 Jan 2021, (1 mark) (c) Explain whether its forward P/E ratio should be higher or lower than the normal forward P.E. (5 marks) (d) Explain whether its PB (Price-to-Book) ratio at 1 Jan 2021 should be higher, lower or equal to 1. (5 marks) (e) Compute its earnings growth rate (ex-dividend) for 2022 and 2023. (2 marks) (f) Compute its earnings growth rate (cum-dividend) for 2022 and 2023 (this assumes shareholders would reinvest the dividends at the required return). (2 marks) Q1 The following forecast is made for Kallang Ltd: EPS (Earnings per Share) DPS (Dividends per Share) 2021 S 6.00 0.50 2022 $ 7.20 0.50 2023 $ 8.20 0.50 The ROCE (Return on Common Equity) for 2021 is 10% The expected market return is 6% and the risk-free return is 2%. Kallang Ltd has an equity beta of 2. Required: For Kallang Ltd: (a) Compute the AEG (Abnormal Earnings Growth) for 2022 and 2023. (10 marks) (b) Compute the normal forward P/E (price-earnings) ratio expected as at 1 Jan 2021, (1 mark) (c) Explain whether its forward P/E ratio should be higher or lower than the normal forward P.E. (5 marks) (d) Explain whether its PB (Price-to-Book) ratio at 1 Jan 2021 should be higher, lower or equal to 1. (5 marks) (e) Compute its earnings growth rate (ex-dividend) for 2022 and 2023. (2 marks) (f) Compute its earnings growth rate (cum-dividend) for 2022 and 2023 (this assumes shareholders would reinvest the dividends at the required return). (2 marks)

Answer rating: 100% (QA)

a To compute the AEG for 2022 and 2023 we first need to calculate the expected ROCE for those years ... View the full answer