Chapter_06web - EXERCISES FOR CHAPTER 6 With Solutions...

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EXERCISES FOR CHAPTER 6 With Solutions Exercise 1. Forecasting Earnings from a Market Price: The Coca Cola Company The Coca-Cola Co (KO) traded at $43 per share at the close of trading on September 25, 2003. Coke had reported earnings per share (eps) of $1.23 for the year ending December 31, 2002, along with an annual dividend per share (dps) of 0.88. Analysts were estimating consensus eps of $1.90 for 2003 and $2.06 for 2004, and dividends of $0.90 each year. Use a cost of equity capital of 9% in calculations. a. Calculate the forward traded P/E ratio. What is the normal forward P/E for this stock? Comparing the traded P/E with the normal P/E, what statements can you make about the market’s expectations of future earnings growth? b. Calculate the trailing P/E. What is the normal trailing P/E for this stock? Why is the trailing P/E so much higher than the forward P/E? c. The analysts’ forecasts indicate a growth rate for eps of 8.42% in 2004. What is the 2004 cum-dividend growth rate implied by the forecasts, and what is the
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Chapter_06web - EXERCISES FOR CHAPTER 6 With Solutions...

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