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

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 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.