Problem (please provide detailed formula and analysis used to get answers)

a) - Estimate a possible growth value, g1, for use in the first stage of a two stage (differential) growth dividend discount model by computing the average annual historical growth, g, of sales, earnings (net income) and dividends over the past five years. Use these actual results to help you form an expectation for g1.

b) - Estimate a value for R by computing 1) - the annual historical total return on the common stock for each year then calculate. 2) - the arithmetic average annual historical return for the 5 year period. The arithmetic average annual historical return that the markets have rewarded a firm with is sometimes used as an "empirical estimate" of future return or expected return, R. Is the market total return constant in each year?

Formula for Annual Return = [adjusted close price December (t) - adjusted close price December (t-1)] / adjusted close price December (t-1)

		2016	2015	2014	2013	2012
For the years ended December 31
Net Sales		$17,509	$19,110	$19,221	$17,301	$17,334
US percentage of sales		54%	56%	52%	48%	47%
Non-US percentage of sales		46%	44%	48%	52%	53%
Gross margin		4,452	4,947	4,861	4,280	4,416
Research, development and engineering expenses		636	735	754	713	728
Equity, royalty and interest income from investees		301	315	370	361	384
Interest expense		69	65	64	41	32
Net income attributable to Cummnins Inc.		1394	1399	1651	1483	1645
Earnings per common share attributable to Cummins Inc.
Basic		$8.25	$7.86	$9.04	$7.93	$8.69
Diluted		8.23	7.84	9.02	7.91	8.67
Cash dividends declared per share		4	3.51	2.81	2.25	1.8
Net cash provided by operating activities		$1,935	$2,059	$2,266	$2,089	$1,532
Capital expenditures		531	744	743	676	690
At December 31,
Cash and cash equivalents		$1,120	$1,711	$2,301	$2,699	$1,369
Total assets		15,011	15,134	15,764	14,728	12,548
Long-term debt		1,568	1,576	1,577	1,672	698
Total equity		7,174	7,750	8,093	7,870	6,974
Adjusted Close Price
December 1,		138.51	82.82	131.82	126.41	95.4