On March 11, 1994, the New York Stock Exchange Composite was trading at 16.9 times earnings, and the average dividend payout ratio across stocks on the exchange was 42.25%. The risk free rate on March 11, 1994, was 6.95%, and the expected market risk premium was 5%. The economy was expected to grow 6% a year, in nominal terms, in the long term.

(a). Based upon these inputs, estimate the justified trailing P/E ratio for the exchange.

(b) What growth rate in dividends (or earnings) would justify the trailing P/E ratio of 16.9 on March 11, 1994?