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    Forecast of Residual and Abnormal Earnings

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    5.The following forecasts of earnings per share (EPS) and dividend per share (DPS) were made at the end of 2007 for Company ABC:
    2008E 2009E Next Three Years
    EPS 4.35 5.23 Growth at 11%
    DPS 0.55 0.68 Growth at 11%

    The book value of ABC's common equity at the end of 2007 was $13.89 per share. Please use the required return for equity of 12% to calculate the following items:

    A.Forecast residual earnings for each of the years, 2008 - 2012.
    B.Forecast abnormal earnings growth for each of the years, 2009 - 2012.

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    Solution Preview

    Attached Excel file contains all the detailed computations to arrive to the answers. You can see all the formulas used if you click in each cell. All cells are colored based on their role in the ...

    Solution Summary

    This solution shows step-by-step calculations to forecast residual and abnormal earnings for growth in specific years by also taking into account the book value of common equity and return for equity.