1. Explain why analysts’ forecast of earnings-per-share growth typically underestimate the growth that an investor values if a firm pays dividends.
2. The historical earnings growth rate for the S&P 500 companies has been around 8.5%. Yet the required growth rate for equity investors is considered to be about 10%. Can you explain the inconsistency?
3. The following formula is often used to value shares, where
Valueofequity0
Earn1
r
g
Valueofequity0=Earn1r−g
Explain why this formula can lead to errors.
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