Suppose that the consensus forecast of security analysts of NoWork Inc. is that earnings next year will be E1 = $5.00 per share. The company tends to plow back 60% of its earnings and pay the rest as dividends. The CFO estimates that the companys growth rate will be 8% from now on.

(b) Suppose you observe that the stock is selling for $50.00 per share, and that this is the best estimate of its equilibrium price. What would you conclude about either (i) your estimate of the stocks required rate of return or (ii) the CFOs estimate of the companys future growth rate?

(c) Suppose there is uncertainty about the growth rate. With 50% probability the growth rate will be 6%, with 50% probability the growth rate will be 10%. What are the respective market values under the two growth rates? What must be the price of the stock, given that both growth rates have equal probability?

(d) Under the probabilities in (c) the expected growth rate of the firm is 8%. How come the valuation in part (c) is different from the valuation in part (a)?