question archive Consider the following two earnings forecasting models: What would be the forecast for earnings per share in FY2019 for each model? Actual earnings per share for Woolworths in FY2019 were $2

Consider the following two earnings forecasting models: What would be the forecast for earnings per share in FY2019 for each model? Actual earnings per share for Woolworths in FY2019 were $2

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  1. Consider the following two earnings forecasting models:
    1. What would be the forecast for earnings per share in FY2019 for each model?
    2. Actual earnings per share for Woolworths in FY2019 were $2.06. Given this information, what would be the FY2020 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?

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Answer:

  1. Model 1 = $1.33 Model 2 = $1.04
  2. Model 1 = $2.06 Model 2 = $1.06

Model 1 describes earnings per share patterns better than Model 2. Model 1 is a simple random walk model that uses current year earnings per share as a benchmark, whereas Model 2 uses the average of the prior five years’ earnings per share as a benchmark. Sales information more than one year old is useful only to the extent that it contributes to the average annual trend. The average level of sales over five prior years does not help in forecasting future EPS

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