# What would be the forecast for earnings per share in FY2010 for each model?Show calculation

a.
Q1.Consider the following two earnings
forecasting models:Show calculation
Model 1
Et(EPSt+1) = EPS t
Model
2 Et(EPSt+1)
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Et(EPSt+1) is the
expected forecasts of earnings per share for year t+1, given information
available at t. Model 1 is usually called a random walk model for earnings,
whereas Model 2 is called a mean-reverting model. The earnings per share for
TJX for the fiscal years ending January 2006
(FY2005) through January 2010
(FY2009) are as follows:

Fiscal
Year

2005

2006

2007

2008

2009

EPS

1.40

1.60

1.70

2.00

2.80

b.
What would be the forecast for earnings
per share in FY2010 for each model?Show calculation

Model 1 (random walk model):

Model 2 (mean-reverting model):

c.
Actual earnings per share for TJX in
FY2010 were \$3.30. Given this information, what would be the FY2011 forecast
for earnings per share for each model? Why do the two models generate quite different
forecasts? Which do you think would better describe earnings per share
patterns? Why?

Model 1:

Model 2:

Q2.a.
Manufactured Earnings is a “darling” of Wall Street analysts. Its current
market price is \$30 per share, and its book value is \$5 per share. Analysts
forecast that the firm’s book value will grow by 5 percent per year indefinitely,
and the cost of equity is 10 percent. Given these facts, what is the market’s
expectation of the firm’s long-term average ROE?

b. Given the information in part a, what will be Manufactured
Earnings’ stock price if the market revises its expectations of long-term
average ROE to 20 percent?

c. Analysts reassess Manufactured Earnings’ future performance as
follows: growth in book value increases to 8 percent per year, but the ROE of
the incremental book value is only 10 percent. What is the impact on the
market-to-book ratio?

Q3. Target Corporation:
Ackman versus the Board. How are the business model
differences reflected in Target;s and Walmart financial performance? How would
you evaluate Target’s relative financial performance to Wal-Mart? What are the
key metrics most useful to understanding their relative performance? How would
you evaluate Target’s relative financial performance to Wal-Mart? What are the
key metrics most useful to understanding their relative performance?
Show all your work/calculations. Do not write
as a paper, simply answer the above questions, but provide the supporting
detail in doing so. Number each answer according to the corresponding question.

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