$($Investment Management $)($ Finance $)$

Adventurous Aubergioe $($AA$)$ and Slowcoach Strawberry $($SS$)$ are two agricultural produce providers with

similar size, age and other firm$-$specific characteristics. According to their latest financial statements, AA

expects $28\mathrm{.}00$ earnings per share and SS expects $15\mathrm{.}80$ earnings per share. The current stock price

of AA is $298\mathrm{.}00$ and of SS is $167\mathrm{.}25.$

a$.$ Estimate the price$-$to$-$earnings ratios for the two firms and decide which one you want to go short

and which one you want to go long on your portfolio.$|$

b$.$ Consider the P$/$E ratio that you calculated in part $($a$)$ above. In addition, suppose that the price$-$to$-$

dividend ratio of $AA$ is $\frac{P}{D}{V}_{AA}=42$ and of $SS$ is $\frac{P}{D}{V}_{SS}=39,$ while the price$-$to$-$ book$-$value ratio of

$AA$ is $\frac{P}{B}V{V}_{AA}=9$ and of $SS$ is $\frac{P}{B}{V}_{SS}=15.$ Compute the composite valuation index CVI below for

each firm and, according to it$,$ decide which firm you want to go short and which to go long in your

portfolio.

CVI$=\frac{1}{3}\frac{P}{E}+{?}_3^1\frac{P}{D}V+{?}_3^1\frac{P}{B}$

c$.$ The earnings$-$per$-$share of AA for the coming years are described by the following equation.

In the equation above, $t=0$ refers to this year, $t=1$ to next year, and so on$.$ And

earnings$-$per$-$share of SS for the coming years are given by:

The investor's required rate of return for both companies is $6\%.$ Identify the

arbitrage opportunity and provide a trade in the two shares that exploits it$.$