Argentinian Motors market cap is 300 billion pesos. Next years free cash flow is 9.6 billion pesos. Security analysts are forecasting that free cash flow will grow by 8.6% per year for the next five years.

Assume that the 8.6% growth rate is expected to continue forever. What rate of return are investors expecting?

b-1. Argentinian Motors has generally earned about 14% on book equity and reinvested 50% of earnings. The remaining 50% of earnings has gone to free cash flow. Suppose the company maintains the same ROE and investment rate for the long run. What will be the growth rate of earnings?

b-2. What would be the rate of return?