a). The P/E ratio of a normal growth firm is 10. The dividend is DPS1=$10, and the stock price is $20. What is the growth rate? [10 marks]

b). In 2010, the stock of AEL traded for P0=$100 with E(DPS1) = $6 per share, k=12% and g=6%. Because of sharp competition in ammunition industry, and mismanagement, the market revised the estimate of the growth rate, making it only 4%. What should be the effect on the stock price?