The earnings and dividend growth prospects of Medical Inc. are disputed by analysts. Analyst #1 is forecasting 5% growth in dividends indefinitely. Analyst #2 however, is predicting a 20% growth in dividends but only for the next three years, after which growth rate is expected to decline to 4% for the indefinite future. Medical dividends per share are currently $3. Stocks with similar risk are currently priced to provide a 14% expected return.

a. What is the intrinsic value of Medical stock according to Analyst #1?

b. What is the intrinsic value of Medical stock according to Analyst #2?

c. Assume that Medical stock now sells for $39.75 per share. If the stock is fairly priced at the present time, what is the implied perpetual dividend growth rate? What is the implied P/E₁ ratio (i.e., todays price over next years earnings), based on this perpetual dividend growth assumption and assuming a 25% payout ratio?