Even Better Products has come out with a new and improved product. As a result,
ID: 2761186 • Letter: E
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 13% rate of return on the stock.
a.
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.)
Price
$
P/E ratio
b.
What is the present value of growth opportunities? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
PVGO
$
c.
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.)
P/E ratio
PVGO
$
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Solution :
ROE
20%
RETENTION RATIO (b)
30%
expected return (Ke)
13%
EPS
2.00
g=ROE*b
6.00%
dividend = 2*(1-.30)
1.4
P0 = D1/(Ke-g)
20.00
1.4/(.13-.06)
P/E ratio= MPS/EPS=20/2
10
b.PVGO = P0 - (EPS/Ke)
4.62
20-(2/.13)
WHAT IS c..
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 13% rate of return on the stock.
Explanation / Answer
c. ROE 20% RETENTION RATIO (b) 15% Expected return (Ke) 13% EPS $2 g=ROE*b 3.00% Dividend = 2*(1-0.15) $1.70 P0 = D1/(Ke-g) 17 1.7/(.13-.03) P/E ratio= MPS/EPS=17/2 8.5 PVGO = P0 - (EPS/Ke) 1.62 17-(2/.13)
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