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%