A stock just paid an annual dividend of $2.9. 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%.

Question:

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

2. In 6 years, the P/E ratio is expected to be 25 and the payout ratio to be 80%. What is the stock price when using the P/E ratio?