It is your first day at a major hedge fund. Your director comes up to you and goes "Hey, Zoom's trading at a P/E (price-earnings) ratio that's much than higher Goldman Sach's. Clearly Zoom is overvalued!" Let's figure out if this is necessarily true. Suppose a common and constant discount rate of 10%. At the end of the year, Zoom will have $.05 earnings a share while Goldman Sachs will have a dollar earnings a share.

a. Goldman Sachs Valuation. Suppose that Goldman's expected earning growth is 3.33% annually. What's the present discounted value of Goldman's earnings? What is the price-earnings (P/E) ratio? (Compute as present discounted value over earnings today.)

b. Zoom Valuation. Suppose that Zoom's expected earning growth is 9% annually. What's the present discounted value of Zoom? What is Zooms P/E Ratio?

c. Analysis. Given the assumptions in Part 1 and 2, is your director right? Why or why not?

d. Optional. Why else might the price to earnings ratio be different?