Value of Growth Opportunities A firm has projected annual earnings per share of
ID: 2798733 • Letter: V
Question
Value of Growth Opportunities A firm has projected annual earnings per share of $5.00 and a dividend payout ratio of 65%. The firm's required return is 18% and dividends and earnings are expected to grow at 3% per year indefinitely. For this firm the present value of its growth opportunities is ________.
$49.44
$52.73
$12.22
$37.22
Beta and Value A firm is expected to pay an annual dividend of $.90 next year. After next year the firm’s dividends will grow at a steady state rate of 4% per year. You are trying to value the stock and Value Line lists a stock beta of 1.29 while Yahoo is reporting a beta of 1.20. The stock is currently priced at $13.10. If E(RM) – Rf = 9.1% and the risk free rate is 3.2% the stock is ____________________ if you use the Value Line beta and is ____________________ if you use the Yahoo beta.
underpriced by $1.31; underpriced by $1.61
overpriced by $4.21; overpriced by $4.87
overpriced by $4.87; overpriced by $4.21
underpriced by $1.61; underpriced by $1.31
Price-Earnings Ratios A firm has positive ROE but zero growth in earnings. The stock is priced at $34.00 and has earnings of $4.20 per share. What is the firm's required return and optimal retention ratio?
8.10%; 1
12.35%; 1
12.35% ; 0
8.10%; 0
Explanation / Answer
1
2
Option C
Price using Value Line=0.9/(3.2%+9.1%*1.29-4%)=8.227443
overpriced by 13.1-8.227443=4.87
Price using Yahoo=0.9/(3.2%+9.1%*1.20-4%)=8.893281
overpriced by 13.1-8.893281=4.21
3
Option B
Required return=4.2*1/34=12.3529%
Optimal retention ratio=growth rate/ROE=0
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