QUESTION 2 The shares of HQ plc are currently trading at 8.68 per share. The company has reported an earnings per share of 0.86 recently; 0.83 last year and 0.82 two years ago. The earnings growth rate is expected to be stable in the future. The company commits to paying 50% of its earnings to shareholders in cash dividends. Equity analysts have used the risk free rate of 3.5% and the market risk premium of 4.5% for the market that Lincoln plc is listed. The company's beta is calculated at 0.95. The competitors in the industry that HQ plc is operating have the average price to earnings ratio of 7.5 times. Required a. What is the current price to earnings ratio of HQ plc? What does this ratio tell you about the value of HQ plc? (15 marks) b. Using the Dividend Growth Model, estimate the fair value of the HQ plc's shares. (25 marks) c. Using results in part b, discuss what investors should do with the shares. Explain why using historic earnings may not produce a good forecast of the fair value