wil maintain a 10 back ra0.30 n sare 2 er share nvestors ven Better Products has
ID: 2803186 • Letter: W
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wil maintain a 10 back ra0.30 n sare 2 er share nvestors ven Better Products has come out with a new and mproved product. As a result, the firm pro ects an ROE o 20 , and expect a 11% rate of return on the stock. s ro e te ea a. At what price and PIE 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 25% of its earnings? (Do not round intermediate calculations. Round your answers to 2 decimal places.) P/E ratio PVGOExplanation / Answer
Growth=ROE*Plowback ratio growth=20*0.3 growth=6% If plowback ratio is 30% dividend payout ratio is 70% therefore projected earning=2 and projected dividend=70% of 2=1.4 Answer 1 Price= D1/(r-g) Price= 1.4/(.11-.06) Price= 28 P/E ratio= price/Earning P/E ratio= 28 divided by 2 P/E ratio= 14 Answer 2 V0=E1/r+PVGO 28=2/.11+PVGO 28= 18.18+PVGO PVGO 9.82 Answer 3 Growth=ROE*Plowback ratio growth=20*0.25 growth= 5% If plowback ratio is 25% dividend payout ratio is 75% therefore projected earning=2 and projected dividend=75% of 2=1.5 Price= D1/(r-g) Price= 1.5/(.11-.05) Price= 25 P/E ratio= price/Earning P/E ratio= 25 divided by 1.5 P/E ratio= 16.66667 V0=E1/r+PVGO 25=2/.11+PVGO 25=18.18+PVGO PVGO= 6.82
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