The following condensed income statement is extracted from a US company's earnings announcement for fiscal year...
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The following condensed income statement is extracted from a US company's earnings announcement for fiscal year (FY) 2021. + Sales revenue Less: Cost of sales Gross profit Less: Operating expenses Condensed Income Statement (in millions) Operating profit Less: Other expense Profit before tax Less: Tax expense Profit after tax Number of shares used in computing earnings per share (EPS) Required: $ $ FY 2021 43,823 $ (35,217) 8,606 (6,583) 2,023 (680) 1,343 (399) 944 $ 986 FY 2020 31,536 (24,906) 6,630 (4,636) 1,994 (840) 1,154 (292) 862 933 (a) Calculate forecast error in EPS for 2021 using the random walk model. Show your workings and round your answers to 3 decimal places. (2 marks) (b) Referring to research evidence of Ball & Brown (1968), briefly explain how the market would react to the earnings announcement? (Maximum words: 80) (2 marks) (c) On a separate day following the earnings announcement, the company announced to switch its depreciation method from straight-line method to reducing balance method, which is applied retrospectively for FY2021. Following the change, the company's "operating expenses" for 2021 increased by $50 million. i. Ignoring tax and referring to the naïve-investor hypothesis discussed in Module 1, briefly explain how the market would react to the announcement. ii. Ignoring tax and referring to the no-effects hypothesis discussed in Module 1, briefly explain how the market would react to the announcement. (Maximum words for Q2c: 200) (4 marks) The following condensed income statement is extracted from a US company's earnings announcement for fiscal year (FY) 2021. + Sales revenue Less: Cost of sales Gross profit Less: Operating expenses Condensed Income Statement (in millions) Operating profit Less: Other expense Profit before tax Less: Tax expense Profit after tax Number of shares used in computing earnings per share (EPS) Required: $ $ FY 2021 43,823 $ (35,217) 8,606 (6,583) 2,023 (680) 1,343 (399) 944 $ 986 FY 2020 31,536 (24,906) 6,630 (4,636) 1,994 (840) 1,154 (292) 862 933 (a) Calculate forecast error in EPS for 2021 using the random walk model. Show your workings and round your answers to 3 decimal places. (2 marks) (b) Referring to research evidence of Ball & Brown (1968), briefly explain how the market would react to the earnings announcement? (Maximum words: 80) (2 marks) (c) On a separate day following the earnings announcement, the company announced to switch its depreciation method from straight-line method to reducing balance method, which is applied retrospectively for FY2021. Following the change, the company's "operating expenses" for 2021 increased by $50 million. i. Ignoring tax and referring to the naïve-investor hypothesis discussed in Module 1, briefly explain how the market would react to the announcement. ii. Ignoring tax and referring to the no-effects hypothesis discussed in Module 1, briefly explain how the market would react to the announcement. (Maximum words for Q2c: 200) (4 marks)
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Answer rating: 100% (QA)
a Calculate forecast error in EPS for 2021 using the random walk model Show your workings and round your answers to 3 decimal places 2 marks The forecast error in EPS for 2021 can be calculated using ... View the full answer
Related Book For
Intermediate Accounting
ISBN: 978-0324300987
10th Edition
Authors: Loren A Nikolai, D. Bazley and Jefferson P. Jones
Posted Date:
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