Question
In: Statistics and Probability
Question 2: The following table provides earnings information about two companies, A Ltd and B Ltd:...
Question 2:
The following table provides earnings information about two companies, A Ltd and B Ltd:
| A Ltd | B Ltd | |
|
Current year’s total earnings |
$595 mil |
$148 mil |
|
Current year’s total shares outstanding |
100 mil |
50 mil |
|
Prior year’s earnings per share |
$6.50 |
$3.93 |
You are also given two different abnormal returns in share price for the current year, -0.026 (i.e., - 2.6%) and -0.017 (i.e., -1.7%), which are calculated from market model equations for A Ltd and B Ltd.
Required:
a) Calculate the forecast error in earnings per share for the current year for both A Ltd and B Ltd
using the random walk model. Show your workings.
b) Referring to research evidence of the information theory and based on your answer in part (a) of this question, briefly explain which abnormal return in share price you should choose for A Ltd and which abnormal return in share price you should choose for B Ltd, respectively. Assume earnings is the only source of new information in the market.
Solutions
orchestra answered 1 year agoRelated Solutions
(a) The following table provides information about two NZX listed companies, A Ltd and B Ltd,...
(a) The following table provides information about two NZX
listed companies, A Ltd and B Ltd, with some missing entries:
A Ltd
B Ltd
Actual return in share price for the current year
0.095
0.065
Expected return in share price for the current year
?
?
Abnormal return in share price for the current year
0.00645
?
Market model equation
E(R) = 0.033 + 1.010 × Rm
?
Two analysts provide the following market model
equations for B Ltd, respectively:
Analyst...
Jamdown & Associates Ltd produces two products, Glam120 and Glam220. The following table provides information on...
Jamdown & Associates Ltd produces two products, Glam120 and
Glam220. The following table provides information on budgeted
production for 2018:
Production Forecast
Product
Quarter 1
Quarter 2
Quarter 3
Quarter 4
Total
Glam120
5,000
6,000
4,800
5,500
21,300
Glam220
6,500
4,600
5,400
6,200
22,700
Notes:
It is the company’s policy to have stock on hand at the end of
each quarter equaling to 10% of production for the next
quarter.
Budgeted production for the first quarter of 2019 were:...
Jamdown & Associates Ltd produces two products, Glam120 and Glam220. The following table provides information on...
Jamdown & Associates Ltd produces two products, Glam120 and
Glam220. The following table provides information on budgeted
production for 2018:
Production Forecast
Product
Quarter 1
Quarter 2
Quarter 3
Quarter 4
Total
Glam120
5,000
6,000
4,800
5,500
21,300
Glam220
6,500
4,600
5,400
6,200
22,700
Notes:
It is the company’s policy to have stock on hand at the end of
each quarter equaling to 10% of production for the next
quarter.
Budgeted production for the first quarter of 2019 were:...
2. In the table below is information for two companies: $000)
2. In the table below is information for two companies:
$000)
Company K
Company L
Net sales(revenues
21,472
23,314
Cost of goods sold
13,050
5,192
Average inventory
350
457
Average accounts receivable
1,837
4,996
Average accounts payable
2,025
1,048
Turnover days
Days inventory outstanding
37
32
Days sales outstanding
31
78
Days payable outstanding
61
75
Total assets
12,500
12,000
Cash conversion cycle
From the above data, make the observations about the relative
performance and determine better-performed company. (Remember that...
the following table provides stock return distributions in the coming year for three companies, A, B...
the following table provides stock return
distributions in the coming year for three companies, A, B and
C.
State of Economy: Normal, Recession
Probability of State of Economy: Normal=0.65, Recession =
0.35
Stock A Rate of Return: Normal = 14.3%
Recession = -9.8%
Stock B Rate of Return: Normal = 16.7%
Recession = 5.4%
Stock C rate of return: Normal = 18.2%
Recession = -26.9%
a) consider a portfolio that is invested 40 percent in
stock A, 30 percent in...
The table below provides information about three firms (A, B, C): CO2 Pollution produced by each...
The table below provides information about three firms (A, B,
C): CO2 Pollution produced by each firm and costs to clean up
pollution (by unit).
Firm
Pollution produced by firm
Costs to clean up pollution (by unit)
A
70 units
$20
B
80 units
$25
C
50 units
$10
The goal is to reduce pollution to 120 units (by three firms).
That is, each firm is allowed to produce 40 units of pollution.
Each firm is given 40 units tradable...
Two companies A and B are in the same industry with identical earnings per share for...
Two companies A and B are in the same industry with identical
earnings per share for the last five years. Company A has a policy
of paying 40% of earnings as dividends while company B pays a
constant amount of dividends per share is lower than that of B. The
following is data on earnings, dividend and market price for the
two companies.
Company A
Year
EPS
DPS
Market price
2006
4
1.6
12
2007
1.5
0.6
8.5
2008
5...
QUESTION 2 Ayittey Ltd is an organization with two divisions: A and B, each with its...
QUESTION
2
Ayittey
Ltd
is an organization with two divisions: A and B, each with its own
cost and revenue streams. Each of the two divisions is classified
as Investment center. The company’s cost of capital is 12%.
Historically, investment decisions have been made by calculating
the return on investment (ROI). A new manager who has recently been
appointed in division A has
argued that using residual income (RI) to make investment decisions
would result in ‘better goal congruence’ throughout...
The location of an element in the periodic table provides awealth of information about effective...
The location of an element in the periodic table provides a
wealth of information about effective nuclear charge, size,
ionization energy, and electron affinity. Using this information,
it is possible to predict which elements are more likely to behave
as oxidizing agents and which are more likely to behave as reducing
agents. Use your knowledge of periodic trends to answer the
following questions about the properties you would expect of an
element that is a good reducing agent.a. Zeff :...
The table below provides revenue and cost information for KB & Children Company Ltd, a perfectly...
The table below provides revenue and cost information for KB
& Children Company Ltd, a perfectly
competitive firm that produces leather shoes.
Output
Total Revenue
Total Variable Cost
Total Costs
1000
$1,000
$1,500
$2,000
2000
$2,000
3000
$3,000
$2,600
4000
$3,900
5000
$5,000
Complete the above table.
What is the firm’s total cost of producing 5000 pairs of
shoes?
What is the average revenue of the firm? Is this amount equal
to the firm’s marginal revenue? Explain.
At what output...
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