A stock just paid an annual dividend of $2.3. The dividend is expected to grow by 8% per year for the next 3 years. The growth rate of dividends will then fall steadily (linearly) from 8% after 3 years to 5% in year 6. The required rate of return is 12%.

a. What is the value of the stock if the dividend growth rate will stay 0.05 (5%) forever after 6 years?

(I've provided how to solve it below)

b. In 6 years, the P/E ratio is expected to be 17 and the payout ratio to be 80%. What is the value of the stock when using the P/E ratio?

	A	B	C	D	E	F	G	H	I
1	Year	0	1	2	3	4	5	6
2	Growth rate		0.09	0.09	0.09	0.08	0.07	0.06
3	Dividend	1.1	1.199	1.307	1.425	1.538	1.646	1.745	=G3*(1+H2)
4	Req. return	0.12
5	P66							30.83	=H3*(1+H2) /(B4-H2)
6	PV		1.071	1.042	1.014	0.978	0.934	16.5	=(H3+H5) /(1+$B4)^H1
7	P00	21.54							=SUM(C6:H6)