Instead of applying the constant dividend growth model to find the stock price in the future, analysts will often combine the dividend discount method with price ratio valuation, often with the PE ratio. Remember that the PE ratio is the price per share divided by the earnings per share. So, if we know the PE ratio, the dividend, and the payout ratio, we can solve for the stock price. To illustrate, suppose we also have the following information about the company:

1. Payout ratio: 25%

2. PE ratio at constant growth rate: 15

c. Use the PE ratio to calculate the stock price when the company reaches a perpetual growth rate in dividends. Now find the value of the stock today using the present value of the dividends during the nonconstant growth period and the price you calculated using the PE ratio.

d. How sensitive is the current stock price to changes in the PE ratio when the stock reaches the perpetual growth rate? Graph the current stock price against the PE ratio in 10 years to find out.