Question: 1. A firm currently has a growth rate for residual earnings of 16 percent, but investors agree that the very long-term growth rate should be the GDP growth rate of 4 percent. What determines the speed by which the 16 percent rate fades to the 4 percent rate over time?
2. Growth is risky. Explain.
3. A share trades at a P/B ratio of 0.8. The no-growth value indicates a P/B of 1.2. What do you infer from this compatison?