A firm whose equity traded at $41.67 per share at the end of 2004 in expected to earn $2.50 per share in 2005 and $2.85 in 2006. The firm pays no dividends.
Set the long-term growth rate for residual earnings equal to the GDP growth rate of 4 percent. Given these forecasts, what is the rate of return you expect to earn from buying the shares?