1. You are an equity analyst examining a firm that makes ice cream utensils. The consensus estimates for the next three years expected EPS (Earnings Per Share) are $2 next year and $2.50 the following year and then $3 in year three. The consensus long term growth rate after that is 3% -- the steady state growth rate for firms such as your closest comp which currently is in steady state growing at 3% and trades at a PE multiple of 10x EPS in the following year. Both you and this comp pay out all earnings as dividends.

(a) What is the appropriate discount rate for this business?

(b) Given your answer to part (a), are you willing to pay $29 per share for the stock?

(c) Given these estimates, what would your long term growth rate need to be to make you indifferent about buying this stock?