1. The company came up with a better product and projects an ROE of 20%. The plowback ratio will be 0.3, and its earnings next year will be $2 per share. The market capitalization rate is 12%.

1. What is the stock's price and what is the P/E ratio (use future earnings of $2 in the P/E ratio)?
2. What is the present value of growth opportunities (PVGO)?
3. How would P/E and PVGO change if the plowback ratio declines to 0.2?

Answer rating: 100% (QA)

Answer To solve this problem we need to use the Gordon Growth Model and the formula for the present ... View the full answer