In the following, assume that all growth and discount rates are stated in real terms.

1. Assume the Eurozone inflation-adjusted average growth in capital stock is 3.0 percent per annum into perpetuity. Long-term labor force growth is expected to remain stable at 0.0 percent, while TFP growth is projected to average 1.0 percent per annum over time. If the output elasticity of capital is 0.4 and the output elasticity of labor is 0.6, calculate the implied growth rate of Eurozone GDP.

2. The Dow Jones Euro Stoxx 50 Index is comprised of mature, large capital common equities domiciled in the Euro currency zone. At 30 September 2009 the index level stood at 2450. Forecasted 12-month dividends per share for the composite (net of withholding tax) are h125.00. Because of the mature nature of the economy and the particular market composite, you project that growth in both inflation-adjusted earnings and dividends will equal that of GDP. Using the Gordon constant dividend growth rate model solved for the discount rate, estimate the implied inflation-adjusted discount rate to perpetuity.

3. A. Applying the Gordon growth model to value the DJ Euro Stoxx 50 Index, you assume that the appropriate discount rate to perpetuity should be 6.0 percent. If this assumption is correct, what is the fair value of the DJ Euro Stoxx 50 Index?

B. As of the end of September 2009, the DJ Euro Stoxx 50 Index was trading almost 30 percent below its high of twelve months earlier. What is the likely major cause for the price decline?