Suppose that the consensus forecast of security analysts of your favorite company is that earnings next year will be E₁ = $5.00 per share. Suppose that the company tends to plow back 50% of its earnings and pay the rest as dividends. If the Chief Financial Officer (CFO) estimates that the companys growth rate will be 8% from now onwards, answer the following questions.

If your estimate of the companys required rate of return on its stock is 10%, what is the equilibrium price of the stock?

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?

Suppose your own 10% estimate of the stocks required rate of return is shared by the rest of the market. What does the market price of $50.00 per share imply about the markets estimate of the companys growth rate?