E6.1. Forecasting EarningsGrowth and AbnormalEarningsGrowth (Easy)

The following are earnings anddividend forecasts madeat the endof2008.The firm has a required equityreturnof 10percentper year.

2009 2010 2011 EPS 3.00 3.60 4.10 DPS 0.25 0.25 0.30 Forecast the ex-dividend earnings growth rate and the cum-dividend earnings growth rate for 2010 and 2011.

b. Forecast abnormal earnings growth for 2010 and 2011.

c. Calculate the normal forward P/E for this firm.

d. Based on your forecasts, do you think this firm will have a forward P/E greater than its normal P/E? Why?