You are analyzing the U.S. equity market based upon the S&P Industrials Index and using the present value of free cash flow to equity technique. Your inputs are as follows:
Beginning FCFE: $80
k = 0.09
Year 1–3: ........ 9%
4–6: ........ 8%
7 and beyond ..... 7%
a. Assuming that the current value for the S&P Industrials Index is 2,050, would you underweight, overweight, or market weight the U.S. equity market?
b. Assume 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.