Problem:
You are analyzing the U.S . equity market based upon the S&P Industrial Index and using the present value of free cash flow to equity technique. Your inputs are as follows:
Beginning FCFE : $80.00
k = 0.09
Growth Rate
year 1-3: 9%
4-6: 8%
7 and beyond 7%
a. Assuming that the current value for the S&P Industrials Index is 1,950, would you underweight, overweight, or market weight the U.S. equity market?
b. Assuming that there is a 1 percent increase in the rate of inflation- what would be the market's value and how would you weight the U.S. market? State your assumptions.