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 .30. Its projected earnings are $2 per share. Investors expect a 12% 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 .30. Its projected earnings are $2 per share. Investors expect a 12% rate of return on the stock.

Explanation / Answer

Even Better Products Details % /Amt $ ROE = 20% Retention Ratio= 30% Growth Rate =ROE*Retention Rate= 6.00% Dividend Payout Ratio= 70% Projected EPS =                         2.0 Expected Dividend Per share =2*70%=                         1.4 Growth Rate =g= 6% Required return of stock =k= 12% a Share Price = Expected Dividend/(k-g) =1.4/(0.12-0.06) = $                23.33 So Share Price   $                23.33 EPS = $                   2.00 P/E Ratio= 23.33/2=                     11.67 b Assune There is no growth in the   earnings Then Price =Expected Dividend/12%=1.4/0.12= $                11.67 PVGO per share =23.33-11.67= $                11.67 c When Retention ratio= 20% ROE = 20% Retention Ratio= 20% Growth Rate =ROE*Retention Rate= 4.00% Dividend Payout Ratio= 80% Projected EPS =                         2.0 Expected Dividend Per share =2*80%=                         1.6 Growth Rate =g= 4% Required return of stock =k= 12% Share Price = Expected Dividend/(k-g) =1.6/(0.12-0.04) = $                20.00 So Share Price   $                20.00 EPS = $                   2.00 P/E Ratio= 20/2=                     10.00 Assune There is no growth in the   earnings Then Price =Expected Dividend/12%=1.6/0.12= $                13.33 PVGO per share =20-13.33= $                   6.67

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