As on 30 June 2020, Harvey Norman Holdings Ltd is traded at $3.54 per share with a book value of $2.83 per share. An analyst expects that the companys earnings per share in 2021, 2022, and 2023 would be $0.40, $0.45, and $0.48, respectively. She also expects the company to pay dividends of $0.25, $0.26, and $0.25 per share in these three years, respectively. The cost of equity is expected to be 10%.

REQUIRED

(a) Calculate present value of abnormal earnings for the years 2021 to 2023. (3 marks)

(b) Calculate terminal value assuming that the growth in abnormal earnings after 2023 would be 3%. (2 marks)

(c) Calculate the value of equity per share. (3 marks)

(d) Comment on whether the market price of $3.54 is overstated or understated. What would the analysts recommendation be for her clients regarding this companys shares: buy, sell, or hold? (2 marks)