Consider the following information:

Required:
1. Use a risk-adjusted cost of capital of 15% to calculate each firm’s implied share price and earnings multiples. Why are the implict share prices and earnings multiples for the two firms different?
2. Repeat requirement ! using a risk-adjusted cost of capital of 8%.

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ABC Corporation XYZ Corporation Reported EPS EPS decomposition $5.00 $5.00 Permanent 75% 55% Transitory 20% 25% Value-irrelevant 5% 20%