Even Better Products has come out with a new and improved product. As a result,

Question

Even Better Products has come out with a new and improved product. As a result, the firm projects an ROE of 20%, and it will maintain a plowback ratio of 0.30. Its projected earnings are $2 per share. Investors expect a 14% rate of return on the stock.

At what price and P/E ratio would you expect the firm to sell? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

What is the present value of growth opportunities? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

What would be the P/E ratio and the present value of growth opportunities if the firm planned to reinvest only 20% of its earnings? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

Even Better Products has come out with a new and improved product. As a result, the firm projects an ROE of 20%, and it will maintain a plowback ratio of 0.30. Its projected earnings are $2 per share. Investors expect a 14% rate of return on the stock.

Explanation / Answer

A. Market price = E1/(Ke-g) = (2)/(0.14-0.3) = 18.18$

PE ratio = MP/ earnings = 18.18/2 = 9.09

B.PVGO = MP- Dividend/ required return = 18.18-(2*0.7)/0.14 = 8.18

C

Market price = E1/(Ke-g) = (2)/(0.14-0.2) = 16.67$

PE ratio = MP/ earnings = 16.67/2 = 8.33

B.PVGO = MP- Dividend/ required return = 16.67-(2*0.8)/0.14 = 5.24$

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