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 0.40. Its projected earnings are $2 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 30% of its earnings? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

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.)

Explanation / Answer

a)

g = 20% * 0.4 = 8%

D1 = 2 * (1-0.4) = 1.2

price = 1.2/0.13-0.08 = 24

P/E = 24/2 = 12

b)

PVGO = 24 - 2/0.13 = 8.62

c)

g = 20% * 0.3 =6%

D1 = 2 * (1-0.3) = 1.4

price = 1.4/0.13 -0.06 = 20

P/E = 20/2 = 10

PVGO = 20 - 2/0.13 = 4.62
P/E =

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