Question

(a) Suppose company A it has a discount rate of 12%, an expected earnings per share of £15.30 and expected growth rate of 3% indefinitely. What is its expected earnings per share (EPS) in the next period? (10 marks) (a) Company A receives some bad news and its price per share falls immediately to £140. What does the market imply EPS is (holding other variables constant). (10 marks) (b) Suppose you estimate the fundamental value of the company is currently less than £140. Explain one possible reason why there is a difference between your estimate of fundamental value and the current market price. (10 marks) (c) Calendar anomalies are the strongest evidence against market efficiency" Analyse the extent to which you agree with this statement. (20 marks) (Total: 50 marks)

Answer 1

1-	expected earning per share	expected dividend for the year *(1+growth rate)	15.3*1.12	17.136
2-	EPS will remain constant because EPS represents earning per share which is calculated by dividing the net income/no of common stock outstanding so there would no change in value of EPS due to change in market price
3-	There may be various reasons for difference in fundamental value and market price, one major cause in demand and supply of common stock in the market, or due to market forces prevailing in the market.
4-	market efficiency refers that share prices reflects the effects of all kind of information and no one can make extra returns using available information but calender anamolies are the exception to this because with the help of calender anamolies analyst make profits using technical analysis which contradict the concept of market efficiency