Year 2008 2007 2006 2005 2004 EPS ($) 2.12 2.06 2.01 .89 1.78 DPS ($) 0.59 0.57 0.54 0.51 0.48 Payout Ratio 0.278 0.277 0.269 0.270 0.270 Growth in EPS (%) 2.9 2.5 6.3 6.2 Growth in DPS (96) 3.5 5.6 5.9 6.3 Rae notes that the EPS of the company has been increasing at an average rate of 4.48 percent per year. The dividend payout ratio has remained fairly stable, and dividends have increased at an average rate of 5.30 percent. In view of a history of dividend payments by the company and the understandable relationship dividend policy bears to the company's earnings, Rae concludes that the DDM is appropriate to value the equity of Tasty Foods. Further, he expects the moderate growth rate of the company to persist and decides to use the Gordon growth model. Rae uses the CAPM to compute the return on equity. He uses the annual yield of 4 per- cent on the 10-year Treasury bond as the risk-free return. He estimates the expected US equity risk premium, with the S&P 500 Index used as a proxy for the market, to be 6.5 percent per year. The estimated beta of Tasty Foods against the S&P 500 Index is 1.10. Accordingly, Rae's estimate for the required return on equity for Tasty Foods is 0.0400.065) 0.115 or percent. Using the past growth rate in dividends of 5.30 percent as his estimate of the future rowth rate in dividends, Rae computes the value of Tasty Foods stock. He shows his analysis to Alex Renteria, his colleague at the pension fund who specializes in the frozen foods indus- try. Renteria concurs with the valuation approach used by Rae but disagrees with the future growth rate he used. Renteria believes that the stocks current price of $8.42 is the fair value of the stock