Explain why analysts’ forecast of earnings-per-share growth typically underestimate the growth that an investor values if a firm pays dividends

1. Explain why analysts’ forecast of earnings-per-share growth typically underestimate the growth that an investor values if a firm pays dividends.
2. The historical earnings growth rate for the S&P 500 companies has been around 8.5%. Yet the required growth rate for equity investors is considered to be about 10%. Can you explain the inconsistency?
3. The following formula is often used to value shares, where LaTeX: Value:of:equity_0

Valueofequity0
is the value of equity at Time 0, LaTeX: Earn_1

Earn1
is forward earnings at Time 1, LaTeX: r

r
is the required rate of return (cost of capital), LaTeX: g

g
is the expected earnings growth rate.

LaTeX: Value:of:equity_0:=:frac{Earn_1}{r:-:g}

Valueofequity0=Earn1rg

Explain why this formula can lead to errors.

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