In March 2004, Fly Papers stock sold for about $73. Security analysts were forecasting a long-term earnings growth rate of 8.5%. The company is expected to pay a dividend of $1.68/share

a. Assume dividends are expected to grow along with earnings at g = 8.5% per year in perpetuity. What rate of return, r, were investors expecting?

b. Fly Paper was expected to earn about 12% on book equity and to pay out about 50% of earnings as dividends. What do these forecasts imply for g? For r?