Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

The following two companies, Omega Ltd and Kappa Corp, have the following information for the current year: Omega Ltd Kappa Corp Current years earnings per

The following two companies, Omega Ltd and Kappa Corp, have the following information for the current year:

Omega Ltd Kappa Corp

Current years earnings per share $6.31 $0.93 Prior years earnings per share $6.24 $1.96 Actual return in share price for the current year 0.072 0.031

We also know that the estimated market model equations for each of these companies is as follows: For Omega Ltd: E(R) = 0.023 + 0.786 * Rm For Kappa Corp: E(R) = 0.067 + 1.367 * Rm Where: E(R) is the expected return for the company in the current year; and Rm is the return on the market for the current year.

REQUIRED: (a) Calculate the forecast error in earnings per share for the current year for both Omega Ltd and Kappa Corp using the random walk model. Show your workings.

(b) Explain briefly what your calculations of the forecast error in earnings per share in part (a) mean for each company.

(c) Calculate the abnormal return in share price for the current year for both Omega Ltd and Kappa Corp if the Rm for the current year is 0.045 (i.e., 4.5%). Show your workings.

(d) Using your answers in parts (a) and (c), explain for Kappa Corp only how the forecast error in earnings per share is related to the abnormal return in share price.

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

The Fiscal Impact Handbook

Authors: David Listokin

1st Edition

1138535672, 978-1138535671

More Books

Students also viewed these Finance questions

Question

1.who the father of Ayurveda? 2. Who the father of taxonomy?

Answered: 1 week ago

Question

Commen Name with scientific name Tiger - Wolf- Lion- Cat- Dog-

Answered: 1 week ago