National City Corporation, a bank holding company, reported earnings per share
of $2.40 in 1993 and paid dividends per share of $1.06. The earnings had grown
7.5% a year over the prior five years and were expected to grow 6% a year in the
long term (starting in 1994) The stock had a β of 1.05 and traded for ten times
earnings. The treasury bond rate was 7%.
a. Estimate the PE Ratio for National City Corporation.
b. What long-term growth rate is implied in the firm's current PE ratio?