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Question 2-2 Parts (14+6= 20 marks) Part 1. Working as a junior analyst for mutual fund, you wonder if your fund should consider adding ABC Food, a large food chain, to your share portfolio. You obtain the following information from its latest financial statements and other sources: $ 100 Earnings: Book value of Equity: $1,000 Dividends: $ 80 You forecast that its earnings will grow by 10% next year and then by 5% per year infinitely. You also expect the dividend payout ratio (Dividends/Earnings) will remain constant and cost of equity will be 10% in the future. Required: a. Forecast ABC Food's dividends in each of the next three years. Use the discounted dividend model to find its value of equity. (5 marks) b. Suppose the clean surplus relationship holds for the company. Forecast ABC Food's abnormal earnings for the next three years. Use the discounted abnormal earnings model to find its value of equity. (9 marks) Part 2. In September 2012, the share price of Apple Inc. reached the record high of USD705. However, the price declined by 40% since then and was around 420 in March 2013. Financial analysts raised a few concerns about Apple's prospects, including increased competition in the industry, uncertainty after the passing away of Steve Jobs, and controversy of its tax practice Required: a. Use the discounted abnormal earnings model to provide THREE possible reasons for the decline in Apple's share price. Your answers must be related to the model, and no marks will be given to answers without explicit discussion on their links to the model. (3 marks) b. In March 2013, a financial analyst recommended investors to buy Apple's shares because "the forward P/E ratio for Apple is only 10, significantly below the historical average and current market average. Please discuss whether it is appropriate to buy a stock solely based on low P/E ratios