An analyst obtains the following information from a companys latest financial statements and other sources:

Earnings per share: $2 Risk-free rate: 4%

Book value of Equity per share: $20 Expected market return: 9%

Dividend per share: $1 Beta: 1.2

The analyst forecast that the companys earnings and dividends will grow by 10% next year and then by 5% every year infinitely. You also expect the clean surplus condition holds and the cost of equity will remain unchanged in the future.

Please answer all sub-questions below.

a. Calculate the companys cost of equity. (5 marks)

b. Forecast the companys dividend per share in each of the next three years. Use the discounted dividend model to find the companys value of equity. (10 marks)

c. Forecast the companys abnormal earnings per share for each of the next three years. Use the discounted abnormal earnings model to find the companys value of equity. (10 marks)