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1. ABC Inc. is currently trading at a forward P/E ratio of 11. Analysts are projecting its earnings per share for the year ended December

1. ABC Inc. is currently trading at a forward P/E ratio of 11. Analysts are projecting its earnings per share for the year ended December 2018 at $2.10.

A. Using a perpetuity model, estimate of the equity cost of capital for ABC Inc.

B. The book value of equity of ABC Inc. at the end of fiscal year 2017 was $15 per share. Calculate abnormal earnings for the fiscal year ended 2018.

C. Assuming perpetuity in abnormal earnings, calculate the predicted stock price of ABC Inc. using the residual income valuation model.

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