Question: Question 5 Show all work ABC has come out with a new and improved product. As a result, the firm projects an ROE of 20%,

Question 5 Show all work

ABC has come out with a new and improved product. As a result, the firm projects an ROE of 20%, and it will maintain a plowback ratio of .60 (i.e., its earnings retention rate b = .60). Its earnings this year will be $3.5 per share. Investors expect a 14% rate of return on the stock (i.e., k_e = .14).

(a) At what price and P/E ratio would you expect the firm to sell?

(b) What is the present value of growth opportunities (PVGO)?

(c) What would be the P/E ratio and the present value of growth opportunities if the firm planned to reinvest only 30% of its earnings?

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