The following forecast of earnings per share (EPS) and dividend per share (DPS) were made at the end of 2006:
2007E 2008E 2009E 2010E 2011E
EPS 3.90 3.70 3.31 3.59 3.90
DPS 1.00 1.00 1.00 1.00 1.00
The firm has an equity cost of capital of 12% per annum.
1. Calculate the abnormal earnings growth for each year 2008 - 2011.
2. What is the per-share value of the equity at the end of 2006 based on the abnormal earnings growth valuation model?
3. What is the expected P/E for 2011?
4. What is the forecasted per-share value of the equity at the end of the year 2011?
5. the stock is trading at $ 20. Make and justify a recommendation as to whether the shares should be purchased?