You are an equity analyst examining a firm F that is currently trading at $40/share. The consensus market estimates for EPS (Earnings Per Share) for the next two years are $4 next year and $5 the year after. You believe these estimates are accurate. Comparable firms in the same industry are trading at a PE multiple of 10X. These firms are assumed to have a long term growth rate starting now at 1% over inflation of 3%, so 4%. Assume all earnings are paid out in dividends. (a) What is appropriate discount rate for this industry given the market data? [6 points) P/E=1/(r-g) 10=1/(r-4%) 10r=1.4 R=14% (b) Given the information above, what is expected price for your firm F in one year after the first dividend is paid? [6 points]? 40=$4/1.14+P/1.14 P=(40-4/1.14)1.14 P-$41.6 (c) Determine what growth rate the market seems to be believing about firm F's long term growth rate after year 1, and consequently then, if you believe growth will be tied to inflation of 3%, do you recommend a buy, sell or hold on this stock? [6 points) P=Dividend/(r-g) $41.6=$5/(14%-g) 41.6*14%-5-41.6G G=41.6*14%-5/41.6 G=2% Since the market believe growth rate will be 2% but our growth rate is 3% so should buy this stock