Metatrend's stock will generate earnings of $5 per share this year. The discount rate for the stock

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Metatrend's stock will generate earnings of $5 per share this year. The discount rate for the stock is 15% and the rate of return on reinvested earnings is also 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: (1) 0%, (2) 40%, (3) 60%.
b. Redo part (a) assuming that the rate of return on reinvested earnings is 20%. What is the present value of growth opportunities for each reinvestment rate?
c. Considering your answers to parts (a) and (b), can you briefly state the difference between companies experiencing growth versus companies with growth opportunities?
Discount Rate
Depending upon the context, the discount rate has two different definitions and usages. First, the discount rate refers to the interest rate charged to the commercial banks and other financial institutions for the loans they take from the Federal...
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Fundamentals of Corporate Finance

ISBN: 978-1259024962

6th Canadian edition

Authors: Richard Brealey, Stewart Myers, Alan Marcus, Devashis Mitra, Elizabeth Maynes, William Lim

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