Even Better Products has come out with a new and improved product. As a result,
ID: 2723449 • 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 14% 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 20% of its earnings? (Do not round intermediate calculations. Round your answers to 2 decimal places.)
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 14% rate of return on the stock.
Explanation / Answer
Part A)
Growth rate g = ROE x plowback ratio
= 0.20 x 0.30
= 6%
Price = EPS1 x (1- plowback ratio)/ (Re-g)
= 2 x (1-0.30)/ (0.14 -0.06)
= 1.40/ 0.08
= 17.50
P/E ratio = Price / EPS
= 17.50 / 2
= 8.75
Part B)
PVGO = Price with growth – EPS/ Re
= 17.50 – 2/0.14
= 3.21
Part C)
Growth rate g = ROE x plowback ratio
= 0.20 x 0.20
= 4%
Price = EPS1 x (1- plowback ratio)/ (Re-g)
= 2 x (1-0.20)/ (0.14 -0.04)
= 1.60/ 0.10
= 16
P/E ratio = Price / EPS
= 16 / 2
= 8
PVGO = Price with growth – EPS/ Re
= 16 – 2/0.14
= 1.71
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.