Two firms each have reported EPS of $5 per share. Firm A has reported that 80% of their earnings are “permanent” earnings, while 20% are one-time “transitory” earnings. Firm B has reported that 60% of their earnings are “permanent” earnings, while 20% are one-time “transitory” earnings and 20% are a current-year impact of an accounting change. For both firms an appropriate cost of capital is 20%.
Calculate the implied share price of Firm A
a. $21 (correct answer, not sure why)
b. $25
c. $30