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An investor has forecasted the following earnings and dividends per share for the Jordanian company...

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Finance

An investor has forecasted the following earnings and dividends per share for the Jordanian company El-Mar (all numbers in Jordanian dinars):

2023 2024 2025 2026 2027
EPS 7.8 7.4 6.62 7.18 7.8
DPS 2 2 2 2 2

The required rate of return for equity is estimated to be around 12%. The book value per share equals 44 at the end of 2022.

a) Forecast residual earnings and compute the intrinsic equity value of El-Mar per 31 December 2022.

b) What is the expected equity value per 31 December 2027?

c) Repeat part a using the abnormal earnings growth model. Compute abnormal earnings growth as cum-dividend earnings minus normal earnings.

d) Prove mathematically that the residual earnings model is always equal to the abnormal earnings growth model.

e) Some people claim that accounting-based valuation models such as the residual earnings model and the abnormal earnings growth model are better valuation models than the often-used discounted cash flow model. Do you agree? Explain!

f) Discuss the following statement: Companies with high residual earnings will have high price-to-earnings ratios.. Is this true? Why/why not?

g) Increased energy prices in 2022 have led to decreasing stock prices of many companies. Why?

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