Assume that the dividend payout ratio will be 75 percent when the rate on long-term government bonds falls to 8 percent. Since investors are becoming more risk averse, the equity risk premium will rise to 7 percent and investors will require a 15 percent return. The return on equity will be 12 percent.

Required:

1) What is the expected sustainable growth rate?

2) What is your expectation of the market P/E ratio?

3) To what price will the market rise if the earnings expectation is $1.5?