Question2

e) Compute the growth opportunity component (PVGO term) in Firm B's share price. Firm C also has expected earnings per share of $15 next year, a required rate of return of 15% and like Firm B, pays out 40% of its earnings every year. However, Firm C's retained earnings are invested in projects that earn exactly the same rate of return as the expected return on Firm C equity ) i. What is the growth rate of earnings of Firm C? ii. Using the DDM, what is the price per share of Firm C? ii. Compute the growth opportunity component (PVGo term) in Firm C's share price. Can you explain (in words) why Firm C is growing faster than Firm A in part (a), but has the same equity price as Firm A? Does growth per se add value? ) ft) Compute the expected dividend yield and expected capital gain components to an investor making an investment in each of these firms. That is, for each firm compute the: i Expected dividend yield E[Div(t+)P(t) ii Expected capital gain E[P(t+1)VPO)-1 Question 2 waterfeather, a manufacturing firm, has an expected return of 12% and has 10 million shares outstanding. Its after-tax earnings for period 1 (it is now period zero) are expected to be $2M. Waterfeather's new investments have provided a 20% return and this is expected to continue