Assume IBM pays out all earnings as dividends. Today is t = 0 and IBM just paid a $2 dividend on $2 of earnings. The market expects dividends will grow each year by 5% until t = 4 and then grow each year by 6% until t = 8, and then grow at some constant rate g thereafter. Right after today's dividend was paid, IBM was trading at a price of $80. The equity discount rate is 10%.
a) What is the market expecting the PE ratio to be at t = 7 (where E in the PE ratio is based on expected earnings at t = 8, and P is based on the t = 7 ex-dividend stock price). b) What is the market expecting g to be?