question archive Consider the following two earnings forecasting models: Model 1: Et(EPSt+1 Model 2: Et(EPSt+1 E(EPSt+1 ) = 1 5 1 ∑ t+1 EPSt ) is the expected forecast of earnings per share for year t+1, given information available at t

Consider the following two earnings forecasting models: Model 1: Et(EPSt+1 Model 2: Et(EPSt+1 E(EPSt+1 ) = 1 5 1 ∑ t+1 EPSt ) is the expected forecast of earnings per share for year t+1, given information available at t

Subject:AccountingPrice: Bought3

Consider the following two earnings forecasting models:

Model 1:

Et(EPSt+1 Model 2: Et(EPSt+1 E(EPSt+1 ) =

1 5

1

∑ t+1

EPSt ) is the expected forecast of earnings per share

for year t+1, given information available at t. Model 1 is usually called a random walk model for earnings, where-as Model 2 is called a mean-reverting model. Figure 6.9 shows earnings per share for Woolworths Limited for the fiscal years ending June 2014 to June 2018.

FIGURE 6.9 Woolworths earnings per share, 2014-18 Fiscal year

EPS

2014 $1.97

2015 2016 $1.71 -$0.98

2017 $1.19

2018 $1.33

a What would be the forecast for earnings per share in FY2019 for each model?

each model? Why do the two models generate quite different forecasts? Which do you think would better describe earnings per share patterns? Why?

pur-new-sol

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