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Present value of free cash flow to equity technique

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.

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