accouting

The following table provides information about two companies, ABC Ltd and XYZ Ltd:

We also know that the estimated market model equations for each of these companies is as follows:

For ABC Ltd: E(R) = 0.058 + 1.075 * Rm

For XYZ Ltd: E(R) = 0.087 + 1.576 * Rm

Where:

E(R) is the expected return for the company in the current year; and

Rm is the return on the market for the current year.

Required:

(a) Calculate the forecast error in earnings per share for the current year for both ABC Ltd and XYZ Ltd using the random walk model. Show your workings.

(b) Explain briefly what your calculations of the forecast error in earnings per share in part (a) mean for each company.

(c) Calculate the return on the market for the current year (Rm) if the abnormal returns in share price for the current year for ABC Ltd and XYZ Ltd are 0.0068 (i.e., 0.68%) and -0.0563 (i.e., -5.63%), respectively. Round the figures to 3 decimal places. Show your workings.