A stock just paid an annual dividend of $1.2. The dividend is expected to grow by 10% per year for the next 3 years. The growth rate of dividends will then fall steadily (linearly) from 10% after 3 years to 7% in year 6.

The required rate of return is 12%.

1What is the stock price if the dividend growth rate will stay0.07 (7%) forever after6 years?

2In 6 years, the P/E ratio is expected to be 24 and the payout ratio to be 80%. What is the stock price when using the P/E ratio?