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

Question

Even Better Products has come out with a new and improved produce. As a result, the firm projects
an ROI of 15%, and it will maintain a plowback ratio of 0.30. It s earnings this year will be $2 per
share. Investors expect a 12% rate of return on the stock.
a. (5 points) At what price would expect the stock to sell?
b. (5 points) What do you expect the trailing price to earnings ratio to be?
c. (5 points) What is the present value of growth opportunities?
d. (5 points)What would be the trailing P/E ratio and the present value of growth opportunities if
the firm planned to reinvest only 10% of its earnings?

Explanation / Answer

Solution:

a) g = ROE*b

       = 0.20*0.30

       = 0.06 or 6%

D1 = $2 (1

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