It has the following financial information for the past 5 years:

 

	2017	2018	2019	2020	2021
	£	£	£	£	£
Earnings per share	1.5	1.62	1.68	1.74	1.82
Share price at the end of the year	5.69	6.28	6.5	7.1	6.98

 

Company 2 usually publishes its financial statements one month after the end of the year.

In other words, the public would only know the earnings for the year one month after the year end. In the last 5 years, Company 2 has paid out 50% of its earnings as dividend.

 

Required

 

(a) Determine the Trailing Twelve-Month Price to Earnings ratio (TTM P/E) for each of the last five years whenever the above data permits. Comment on how well the Trailing P/E can be used in practice.                                                   

 

(b) Determine the Forward Price to Earnings ratio (Forward P/E) for each of the last five years whenever the above data permits. Comment on how well the Forward P/E can be used in practice.                                                                

 

(c) (i) Determine the average (compounded) growth rate on dividend per share for the last 5 years.                         

(ii) Assume that Company 2 is expected to continue with the same growth rate on dividend and that the share price at the end of 2021 is correct. Determine the cost of equity if the Gordon's Growth Model applies.                      

 

(iii) Suppose you have the following information using the last 5 years' returns on Company 2 (R₂) and FTSE All (R_m) as the market:

 

            Covariance (R₂, R_m) = 30%

            Variance (R_m) = 20%

            Average R_m using the last 5 years' monthly returns = 7%

            Risk-free rate available as on 1 January 2022 = 2%

Determine the cost of equity using the CAPM. State any assumptions you use for the calculation. How would you adjust the beta value using the Blume's adjustment?