1. You are an equity analyst examining a firm that is currently trading at $50/share. The consensus market estimates for EPS (Earnings Per Share) for the next two years are $4 next year and $4.59 the year after. You believe these estimates are accurate along with the average long term growth rate estimate of 2% starting today. Assume all earnings are paid out in dividends.

(a) What is the estimate for the expected stock price for the stock in one years time?

(b) What is the long term growth rate from the year 2 EPS onwards with the information from above?

(c) You believe that long term growth beginning after next year will continue along the lines of what people believe now rather than changing as the market seems to believe. With this assumption, would you recommend a buy, sell or hold on this stock?

2. 4. In which of the following three cases where a simple DCF generates a positive NPV could a Real Options analysis impact your decision vs just investing in the positive NPV project: (i) A project with a positive NPV also has sequel projects that could potentially be attractive; (ii) A project with a positive NPV could be aborted at any time and thus allow the firm to recover a significant portion of their initial outlay; or (iii) A project with a positive NPV does not necessarily need to be invested in now but the firm can wait and learn from the business environment over the next year.