Question
Consider the following Earnings forecasts made at the end of 2020. Assume the discount rate is 10% for this firm. 2021 2022 2023 Earnings Per
Consider the following Earnings forecasts made at the end of 2020. Assume the discount rate is 10% for this firm.
2021 2022 2023
Earnings Per Share (EPS) 3.00 3.60 4.10
Dividend Per Share (DPS) .25 .25 .30
1. Calculate the Normal forward P/E ratio for this firm (i.e., the P/E ratio assuming perfect income statement)
2. Calculate the forecasted EPS year-over-year growth rate (in %) for Year 2022 and Year 2023
3. Based on the forecasted EPS growth rate, do you think the firm would have an actual forward P/E ratio greater or less than the Normal forward P/E ratio? Why?
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