Prospective Analysis - Assignment Example

The random walk model outlines that the stock price or earnings change have same distributions and are independent of each other thus past movements of stock price or earnings cannot be used to predict the future stock price movement. I disagree with John’s forecast strategy since the assumption of unchanging mean and variance is debatable. b. A merger or acquisition is will increase the future net income due to higher sales growth and more revenue generation from the acquisition. The merger or acquisition will reduce competition thus enhance the future net income.

The best model that describes a better pattern of the earnings per share is the mean-reversion model since competition in the market will drive abnormal levels of profits to mean while reinvestment of the earnings will likely earn more levels of earnings. According to many analysts, the Earnings Factory is a ‘darling’ of the ASX. Its current market price $ 15 per share and its book value is $ 5 per share. Analysts forecast that the organisation’s book value will grow by 10 per cent per year indefinitely and the cost of equity is 15 per cent.

The market’s expectation of the organisation’s long-term average ROE is calculated as follows; Companies with a high ROE can have a low PE ratio when the investors expect the firm will continue generate positive abnormal ROEs. The PE ratio is the market price per share divided by the earnings per