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Understanding Check Questions


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Please make a selection of the company you are willing to take a long position in-

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Recall that you will receive extra pay if the actual EPS of your chosen company increases in the future. Specifically, you will receive $0.20 for every 1 cent the company's actual EPS in the following year(20X3)exceeds the consensus analysts' forecast.

For example, assume that a participant, John, finds out that the company he has chosen has an actual EPS of $2.60 in 20X3. Further assume that the consensus analysts' forecast for 20X3 is $2.38 and that John's own EPS forecast for 20X3 is $2.50.

The adjustment to John's $16 base payment for completing this experiment is:

John gets $0.20 for every l cent actual EPS is higher than the consensus analysts' forecast: i.e. $0.20*($2.60-$2.38)=$0.20*22 cents difference (actual>consensus) = $4.40.Thus,John gets $4.40 in addition to his $16 base payment.

John's own EPS forecast does not affect his additional payment; but John will get an additional $30 if his EPS forecast turns out to be the most accurate EPS forecast among all participants.

To ensure that you understand how the compensation is calculated, try this example:

Another participant,Jenna, has chosen a different company.The consensus analysts' forecast for 20X3 is $3.30; Jenna's own EPS forecast is $3.35 and the actual EPS is revealed to be $3.20.

2.What will the adjustment to Jenna's base payment of $16 be? {{ formfield player.Q2 }}

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