Answer/comment on each of the following items:

2 pgs

1.Explain why analysts' forecast of earnings-per-share growth typically underestimate the growth that an investor values if a firm pays dividends.

2.The historical earnings growth rate for the S&P 500 companies has been around 8.5%. Yet the required growth rate for equity investors is considered to be about 10%. Can you explain the inconsistency?

3.The following formula is often used to value shares, whereValueofequity 0 is the value of equity at Time 0,Earn1is forward earnings at Time 1,ris the required rate of return (cost of capital),g is the expected earnings growth rate.

Valueofequity 0= Earn1/rg

Explain why this formula can lead to errors.