National City, a bank holding company, reported earnings per share of $2.40 and paid dividends per share of $1.06.The earnings had grown 7.5% a year over the prior five years, and were expected to grow 6% a year in the long run. The stock had a beta of 1.05 and traded for ten times earnings. The Treasury bond rate was 7%.

a. Estimate the P/E ratio for National City.

b. What long-term growth rate is implied in the firm’s current PE ratio?