# Question

Metatrend’s stock will generate earnings of $6 per share this year. The discount rate for the stock

is 15%, and the rate of return on reinvested earnings also is 15%.

a. Find both the growth rate of dividends and the price of the stock if the company reinvests the following fraction of its earnings in the firm: (i) 0%; (ii) 40%; (iii) 60%

b. Redo part (a) now assuming that the rate of return on reinvested earnings is 20%. What is the present value of growth opportunities for each reinvestment rate?

Earnings.......... ....$6.00

Discount rate.............15.00%

Rate of return on reinvested earnings...15.00%

Reinvestment: (a)

(i) ................0.00%

(ii) ................40.00%

(iii) ................60.00%

Rate of return on reinvestment (b) ..... 20.00%

is 15%, and the rate of return on reinvested earnings also is 15%.

a. Find both the growth rate of dividends and the price of the stock if the company reinvests the following fraction of its earnings in the firm: (i) 0%; (ii) 40%; (iii) 60%

b. Redo part (a) now assuming that the rate of return on reinvested earnings is 20%. What is the present value of growth opportunities for each reinvestment rate?

Earnings.......... ....$6.00

Discount rate.............15.00%

Rate of return on reinvested earnings...15.00%

Reinvestment: (a)

(i) ................0.00%

(ii) ................40.00%

(iii) ................60.00%

Rate of return on reinvestment (b) ..... 20.00%

## Answer to relevant Questions

You expect a share of stock to pay dividends of $1.00, $1.25, and $1.50 in each of the next 3 years. You believe the stock will sell for $20 at the end of the third year. a. What is the stock price if the discount rate for ...Stormy Weather has no attractive investment opportunities. Its return on equity equals the discount rate, which is 10%. Its expected earnings this year are $4 per share. Find the stock price, P/E ratio, and growth rate of ...The Ensyder Trading Company (ETC) is a zero growth firm with an EBIT of $250,000 and a corporate tax rate of 40%. ETC uses $1 million of debt financing and the cost of equity of an unlevered firm in the same risk class is ...Imagine that you have been tasked with analyzing the toxic risk posed by a chemical being emitted from a local factory and setting a safe emission limit. Which of the modifying factors of toxic effects (Chapter 5) do you ...Use the following data to find the direct labor cost variance. Direct labor standard (3.5 hrs. @ $7/hr.) $24.5 per unitActual hours worked per unit 3 hoursActual units produced 3,100 unitsActual rate per hour $7.5a. $8,700 ...Post your question

0