Refer back to the valuations in Exercise above $($ignore$).$ In that pro forma, an analyst forecast $$388$ mil$-$

lion of earnings for $2013$ on a book value at the end of $2012$ of $$4,310$ million, that is$,$ a

return on common equity of $9$ percent. The forecasts were made at the end of $2012$ based

on preliminary reports from the firm.

When the final report was published, however, the analyst discovered that the firm had de$-$

cided to write$-$down its inventory at the end of $2012$ by $$114$ million $($following the lower$-$

of$-$cost$-$or$-$market rule$).$ As this was inventory that the analyst forecasted would be sold in

$2013($and thus the impairment affects cost of goods sold for that year$),$ the analyst revised

her earnings forecast for $2013.$ For questions $($a$)$ and $($b$),$ ignore any effect of taxes.

a$.$ What is the revised earnings forecast for $2013$ as a result of the inventory impairment

assuming no change in the sales forecast? What is the revised forecast of return on

common equity $($ROCE$)$ for $2013?$

B$.$ Show that the revision in the forecast of $2013$ earnings does not change the valuation

of the equity.

c$.$ Recognize, now, that the firm's income tax rate is $35$ percent. Do your answers to ques$-$

tions $($a$)$ and $($b$)$ change?