XYZ Inc. has expected earnings over the next year of $3/share (E1 = 3). The company is expected to maintain an earnings retention rate of 20%, i.e., 80% of earnings are expected to be paid out as dividends every year. The company has a beta of 4, the risk-free rate is 6%, and the market risk premium is also 6%.

1. If the ROE is expected to be 25% in perpetuity

   1. What is the implied growth rate?

   2. What is the value of the stock?

   3. What is the present value of growth opportunities?

Answer rating: 100% (QA)

Here Return on Equity 25 Retention Ratio 20 1 Using the Formula of Growth Rate The growth rate ... View the full answer