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 $3 per share. Investors expect a 13% 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 15% 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 $3 per share. Investors expect a 13% rate of return on the stock.

Explanation / Answer

Answer:a

g = ROE×b = 0.20×0.30 = 0.06 = 6.0%

D1= $3(1 – b) = $3(1 – 0.30) = $2.1

P0=D1/Ke-g

=2.1/0.13-0.06

=30

P/E=30/3=10

Answer:b

PVGO=P0-E0/K

=30-3/0.13

=30-23.076

=6.92

Answer:c

g = ROE×b = 0.20×0.15 = 0.063= 3.0%

D1= $3(1 – b) = $3(1 – 0.15) = $2.55

P0=D1/Ke-g

=2.55/0.13-0.03

=25.5

P/E=25.5/3=8.5

PVGO=P0-E0/K

=25.5-3/0.13

=25.5-23.076

=2.424

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