Question: Abnormal Earnings Growth Valuation and Accounting Methods (Hard) Refer back to the valuation. In the proforma there, an analyst forecasted earnings of$388 million for 2013. The forecast was made at the end of2012 based on preliminary reports from the firm. When the final report was published, however, the analyst discovered that the firm had decided to write down its inventory at the end of2012 by $114 million (following the lowerof-cost-or-market rule). As this was inventory that the analyst had forecasted would be sold in 2013 (and thus the impairment affects cost of goods sold for that year), the analyst revised her earnings forecast for 2013. For questions (a) and (b), ignore any effect of taxes.
a. What is the revised earnings forecast for 2013 as a result of the inventory impairment assuming no change in sales forecasts?
b. Show that the revision in the forecast of 2013 earnings does not change the valuation of the equity.
c. Now assume that the firm's income tax rate is 35 percent. Do your answers to questions (a) and (b) change?